sv4za
As filed with the Securities and
Exchange Commission on October 14, 2008
Registration
No. 333-153440
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DELL
INC.
(Exact name of registrant as specified in its charter)
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Delaware
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3571
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74-2487834
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State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial Classification Code Number)
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(I.R.S. Employer
Identification Number)
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One Dell Way
Round Rock, Texas 78682
(512) 338-4400
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Lawrence P. Tu
General Counsel and Secretary
Dell Inc.
One Dell Way
Round Rock, Texas 78682
(512) 338-4400
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(Address, including zip code, and telephone number,
including area code, of the registrants principal
executive offices)
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(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
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Copy
to:
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Janet B. Wright
Director Corporate Legal
Dell Inc.
One Dell Way
Round Rock, Texas 78682
(512) 338-4400
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Douglass M. Rayburn
Baker Botts L.L.P.
2001 Ross Avenue
Dallas, Texas 75201
(214) 953-6500
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Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable
following the effectiveness of this Registration Statement.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer x
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act, or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting any offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
OCTOBER 14, 2008
PROSPECTUS
Dell Inc.
Offer to Exchange
up to
$600,000,000
of 4.700% Notes due 2013
that have been registered under the Securities Act of 1933, as
amended (the Securities Act)
for
$600,000,000
of 4.700% Notes due 2013
that have not been registered under the Securities Act
and
$500,000,000
of 5.650% Notes due 2018
that have been registered under the Securities Act
for
$500,000,000
of 5.650% Notes due 2018
that have not been registered under the Securities Act
and
$400,000,000
of 6.500% Notes due 2038
that have been registered under the Securities Act
for
$400,000,000
of 6.500% Notes due 2038
that have not been registered under the Securities Act
The exchange offer and withdrawal rights will expire at
5:00 p.m., New York City time,
on ,
2008, unless extended.
We are offering to exchange up to $600,000,000 aggregate
principal amount of our new 4.700% Notes due 2013, which
have been registered under the Securities Act, or the new
2013 notes, for any and all of our outstanding
unregistered 4.700% Notes due 2013, or the old 2013
notes; up to $500,000,000 aggregate principal amount of
our new 5.650% Notes due 2018, which have been registered
under the Securities Act , or the new 2018 notes,
for any and all of our outstanding unregistered
5.650% Notes due 2018, or the old 2018 notes;
and up to $400,000,000 aggregate principal amount of our new
6.500% Notes due 2038, which have been registered under the
Securities Act, or the new 2038 notes, for any and
all of our outstanding unregistered 6.500% Notes due 2038,
or the old 2038 notes. The new 2013 notes, the new
2018 notes and the new 2038 notes are referred to in this
prospectus as the new notes. The old 2013 notes, the
old 2018 notes and the old 2038 notes are referred to in this
prospectus as the old notes. We issued the old notes
on April 17, 2008 in a transaction not requiring
registration under the Securities Act. We are offering you new
notes in exchange for old notes in order to satisfy our
registration obligations from that previous transaction. The old
notes and the new notes are collectively referred to in this
prospectus as the notes, and the new notes of each
series will be treated as a single class with any old notes of
such series that remain outstanding after the completion of the
exchange offer.
Please read Risk Factors beginning on page 7
for a discussion of factors you should consider before
participating in the exchange offer.
We will exchange new notes for all outstanding old notes that
are validly tendered and not withdrawn before expiration of the
exchange offer. You may withdraw tenders of old notes at any
time prior to the expiration of the exchange offer. The exchange
procedure is more fully described in Exchange
OfferProcedures for Tendering. If you fail to tender
your old notes, you will continue to hold unregistered notes
that you will not be able to transfer freely.
The terms of the new notes are substantially the same as the old
notes, except that the transfer restrictions and registration
rights applicable to the old notes do not apply to the new notes
and, unlike the old notes, the new notes have been registered
under the Securities Act and therefore are freely transferable.
Please read Description of New Notes for more
details on the terms of the new notes. We will not receive any
cash proceeds from the issuance of the new notes in the exchange
offer.
Each broker-dealer that receives new notes for its own account
pursuant to this offering must acknowledge that it will deliver
this prospectus in connection with any resale of such new notes.
The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an underwriter within the meaning
of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of new notes received in exchange for
old notes where such old notes were acquired by such
broker-dealer as a result of market-making activities or other
trading activities. We have agreed that, for a period of
180 days after the expiration date (as defined herein), we
will make this prospectus available to any broker-dealer for use
in connection with any such resale. Please read Plan of
Distribution.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2008.
This prospectus is part of a registration statement we filed
with the Securities and Exchange Commission. You should rely
only upon the information provided in this prospectus and the
other information that we have specifically provided you in
connection with this offering. We have not authorized anyone to
provide you with additional or different information. We are not
making an offer of these securities in any jurisdiction where
the offer is not permitted. You should assume that the
information in this prospectus is accurate only as of the date
on the front of this prospectus.
TABLE OF
CONTENTS
AVAILABLE
INFORMATION
We have filed a registration statement on
Form S-4
under the Securities Act with the SEC with respect to the
issuance of the new notes. This prospectus, which is included in
the registration statement, does not contain all of the
information included in the registration statement. Certain
parts of this registration statement are omitted in accordance
with the rules and regulations of the SEC. For further
information about us and the new notes, we refer you to the
registration statement. You should be aware that the statements
made in this prospectus as to the contents of any agreement or
other document filed as an exhibit to the registration statement
are not complete. Although we believe that we have summarized
the material terms of these documents in the prospectus, these
statements should be read along with the full and complete text
of the related documents.
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
document we file at the SECs public reference room in
Washington, D.C. Please call the SEC at
1-800-SEC-0330
for further information on the public reference rooms. Our SEC
filings are also available to the public from the SECs
website at www.sec.gov or from our website at www.dell.com.
However, neither the information on our website nor our
filings on the SECs website constitute a part of this
prospectus.
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FORWARD-LOOKING
STATEMENTS
This prospectus and the documents to which we refer you in this
prospectus contain forward-looking statements that
are based on Dells current expectations. Actual results in
future periods may differ materially from those expressed or
implied by those forward-looking statements because of a number
of risks and uncertainties. In addition to other factors and
matters contained in this document, including those disclosed
under Risk Factors, these statements are subject to
risks, uncertainties and other factors, including, among others:
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failure to exchange your old notes may adversely affect their
value because they may be more difficult to sell;
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general economic, business and industry conditions;
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our ability to reestablish a cost advantage over our competitors;
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our ability to generate substantial
non-U.S. net
revenue;
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our ability to accurately predict product, customer and
geographic sales mix and seasonal sales trends;
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information technology and manufacturing infrastructure failures;
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our ability to effectively manage periodic product transitions;
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disruptions in component or product availability;
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our reliance on vendors;
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our reliance on third-party suppliers for quality product
components, including reliance on several single-source or
limited-source suppliers;
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our ability to access the capital markets;
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risks relating to our internal controls;
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unfavorable results of legal proceedings could harm our business
and result in substantial costs;
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our acquisition of other companies;
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our ability to properly manage the distribution of our products
and services;
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our cost-cutting measures;
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effective hedging of our exposure to fluctuations in foreign
currency exchange rates and interest rates;
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obtaining licenses to intellectual property developed by others
on commercially reasonable and competitive terms;
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our ability to attract, retain and motivate key personnel;
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loss of government contracts;
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expiration of tax holidays or favorable tax rate structures;
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changing environmental laws;
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the effect of armed hostilities, terrorism, natural disasters
and public health issues;
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we may incur substantially more debt and increase the risks
associated with our proposed leverage;
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effective subordination of the notes may reduce amounts
available for payment of the notes;
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changes in our credit ratings may adversely affect the value of
the notes; and
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your ability to transfer the notes may be limited since there is
no active trading market for them.
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Other unknown or unpredictable factors also could have a
material adverse effect on our business, financial condition and
results of operations. Accordingly, readers should not place
undue reliance on these forward-looking statements. The use of
words such as anticipates, estimates,
expects, intends, plans, and
believes, among others, generally identify
forward-looking statements; however, these words are not the
exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other
characterizations of future events or circumstances are
forward-looking statements. These forward-looking statements are
inherently subject to uncertainties, risks and changes in
circumstances that are difficult to predict. We are not under
any obligation and do not intend to publicly update or review
any of these forward-looking statements, whether as a result of
new information, future events or otherwise, even if experience
or future events make it clear that any expected results
expressed or implied by those forward-looking statements will
not be realized. Please carefully review and consider the
various disclosures made in this prospectus that attempt to
advise interested parties of the risks and factors that may
affect our business, results of operations, financial condition
or prospects.
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INDUSTRY
AND MARKET DATA
This prospectus includes estimates of market share and industry
data and forecasts that we obtained from industry publications
and surveys, including those of IDC Worldwide Quarterly PC
Tracker, and internal company estimates. Industry publications
and surveys and forecasts generally state that the information
contained therein has been obtained from sources believed to be
reliable, but there can be no assurance as to the accuracy or
completeness of the included information. We have not
independently verified any of the data from third-party sources
nor have we or the initial purchasers ascertained the underlying
economic assumptions relied upon therein. Unless otherwise
noted, all references to industry share and total industry
growth data in this prospectus are for personal computers
(including desktops, notebooks, and x86 servers), and are based
on information provided by IDC Worldwide Quarterly PC Tracker
dated March 4, 2008 (in the case of data relating to Fiscal
2008) or July 25, 2008 (in the case of data relating
to the three and six months ended August 1, 2008). Market
share and industry data and forecasts based on internal company
estimates may vary materially from others in our industry. We
cannot assure you that internal company estimates are accurate
or that estimated growth rates will be achieved. Our estimates
involve risks and uncertainties, and are subject to change based
on various factors, including those discussed under the heading
Risk Factors in this prospectus.
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SUMMARY
The following summary contains basic information about our
company and the exchange offer. It may not contain all of the
information that is important to you and it is qualified in its
entirety by the more detailed information included in this
prospectus. You should carefully consider the information
contained in the entire prospectus, including the information
set forth under the heading Risk Factors in this
prospectus. In addition, certain statements included
forward-looking information that involves risks and
uncertainties. See Forward-Looking Statements.
Except as otherwise required by the context, in prospectus,
our company, we, us and
our refer to Dell Inc. and its subsidiaries, the
issuer or Dell refers to Dell Inc.,
exclusive of its subsidiaries.
GENERAL
We listen to customers and deliver innovative technology and
services they trust and value. As a leading technology company,
we offer a broad range of product categories, including desktop
PCs, notebooks, software and peripherals, servers and networking
products, services, and storage. According to IDC, we are the
number one supplier of personal computer systems in the United
States, and the number two supplier worldwide.
Our company is a Delaware corporation and was founded in 1984 by
Michael Dell on a simple concept: by selling computer systems
directly to customers, we can best understand their needs and
efficiently provide the most effective computing solutions to
meet those needs. Our corporate headquarters are located in
Round Rock, Texas, and we conduct operations worldwide through
subsidiaries. When we refer to our company and its business in
this prospectus, we are referring to the business and activities
of our consolidated subsidiaries. We operate principally in one
industry, and we manage our business in four operating segments:
Americas Commercial; Europe, Middle East and Africa
(EMEA) Commercial; Asia Pacific-Japan
(APJ) Commercial; and Global Consumer. See
BusinessOperating Business Segments.
We are committed to managing and operating our business in a
responsible and sustainable manner around the globe. This
includes our commitment to environmental responsibility in all
areas of our business. In June 2007, we announced an ambitious
long-term goal to be the greenest technology company on
the planet and have a number of efforts that take the
environment into account at every stage of the product
lifecycle. See BusinessSustainability. This
also includes our focus on maintaining a strong control
environment, high ethical standards, and financial reporting
integrity.
BUSINESS
STRATEGY
Our core business strategy is built around our direct customer
model, relevant technologies and solutions, and highly efficient
manufacturing and logistics; and we are expanding that core
strategy by adding new distribution channels to reach even more
commercial customers and individual consumers around the world.
Using this strategy, we strive to provide the best possible
customer experience by offering superior value; high-quality,
relevant technology; customized systems and services; superior
service and support; and differentiated products and services
that are easy to buy and use. Historically, our growth has been
driven organically from our core businesses. Recently, we have
begun to pursue a targeted acquisition strategy designed to
augment select areas of our business with more products,
services, and technology that our customers value. For example,
with our recent acquisition of EqualLogic, Inc., a leading
provider of high-performance storage area network solutions, and
the subsequent expansion of Dells PartnerDirect channel,
we are ready to deliver customers an easier and more affordable
solution for storing and processing data.
1
THE
EXCHANGE OFFER
On April 17, 2008, we completed a private offering of
$600 million aggregate principal amount of our
4.700% Notes due 2013, $500 million aggregate
principal amount of our 5.650% Notes due 2018 and
$400 million aggregate principal amount of our
6.500% Notes due 2038, or the old notes. As part of this
private offering, we entered into a registration rights
agreement with the initial purchasers of the old notes in which
we agreed, among other things, to deliver this prospectus to you
and to use our reasonable best efforts to complete the exchange
offer no later than the 45th business day after the date on
which the registration statement, of which the prospectus forms
a part, is declared effective by the SEC. The following is a
summary of the exchange offer.
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Old Notes |
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On April 17, 2008, we issued $600 million aggregate principal
amount of our 4.700% Notes due 2013, $500 million
aggregate principal amount of our 5.650% Notes due 2018 and
$400 million aggregate principal amount of our
6.500% Notes due 2038. |
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New Notes |
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4.700% Notes due 2013, 5.650% Notes due 2018 and
6.500% Notes due 2038. The terms of the new notes are
substantially the same as the terms of the old notes, except
that the transfer restrictions and registration rights relating
to the old notes do not apply to the new notes. The new notes of
each series offered hereby, together with any old notes of such
series that remain outstanding after the completion of the
exchange offer, will be treated as a single class for all
purposes under the indenture, including, without limitation,
waivers, amendments, redemptions and offers to purchase. The new
notes will have a CUSIP number different from that of any old
notes that remain outstanding after the completion of the
exchange offer. In the case of the new notes, all unpaid
interest accrued on old notes from April 17, 2008 will be
treated as having accrued on the new notes that are issued in
exchange for the old notes. |
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Exchange Offer |
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We are offering to exchange up to $600 million aggregate
principal amount of our 4.700% Notes due 2013,
$500 million aggregate principal amount of our
5.650% Notes due 2018 and $400 million aggregate
principal amount of our 6.500% Notes due 2038 that have
been registered under the Securities Act of 1933, as amended, or
the Securities Act, for an equal amount of our outstanding
$600 million aggregate principal amount of our
4.700% Notes due 2013, $500 million aggregate
principal amount of our 5.650% Notes due 2018 and
$400 million aggregate principal amount of our
6.500% Notes due 2038, respectively, that have not been so
registered to satisfy our obligations under the registration
rights agreement that we entered into when we issued the old
notes in a transaction exempt from registration under the
Securities Act. |
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Expiration Date |
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The exchange offer will expire at 5:00 p.m., New York City
time,
on ,
2008, unless we decide to extend it. |
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Conditions to the Exchange Offer |
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The registration rights agreement does not require us to accept
old notes for exchange if the exchange offer or the making of
any exchange by a holder of the old notes would violate any
applicable law or interpretation of the staff of the SEC or if
any legal action has been instituted or is reasonably likely to
be instituted that would impair our ability to proceed with the
exchange offer. A minimum aggregate principal amount of old
notes being tendered is not a condition to the exchange offer.
Please read Exchange OfferConditions to the Exchange
Offer for more information about the conditions to the
exchange offer. |
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Procedures for Tendering Old Notes |
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All of the old notes are held in book-entry form through the
facilities of The Depository Trust Company, or DTC. To
participate in the exchange offer, you must follow the automatic
tender offer program, or ATOP, procedures established by DTC for
tendering notes held in book-entry form. The ATOP procedures
require that the exchange agent receive, prior to the expiration
date of the exchange offer, a computer-generated message known
as an agents message that is transmitted
through ATOP and that DTC confirm that: |
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DTC has received
instructions to exchange your old notes; and
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you agree to be bound by the
terms of the letter of transmittal included herewith.
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For more details, please read Exchange Offer
Terms of the Exchange Offer and Exchange
Offer Procedures for Tendering. |
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Guaranteed Delivery Procedures |
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None. |
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Withdrawal of Tenders |
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You may withdraw your tender of old notes at any time prior to
the expiration date. To withdraw, you must submit a notice of
withdrawal to the exchange agent using ATOP procedures before
5:00 p.m., New York City time, on the expiration date
of the exchange offer. Please read Exchange
Offer Withdrawal of Tenders. |
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Acceptance of Old Notes and Delivery of New Notes |
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If you fulfill all conditions required for proper acceptance of
old notes, we will accept any and all old notes that you
properly tender in the exchange offer before 5:00 p.m., New
York City time, on the expiration date. We will return any old
notes that we do not accept for exchange to you without expense
promptly after the expiration date. We will deliver the new
notes promptly after the expiration date. Please read
Exchange Offer Terms of the Exchange
Offer. |
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Fees and Expenses |
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We will bear all expenses related to the exchange offer. Please
read Exchange Offer Fees and Expenses. |
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Use of Proceeds |
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The issuance of the new notes will not provide us with any new
proceeds. We are making the exchange offer solely to satisfy our
obligations under our registration rights agreement. |
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Consequences of Failure to Exchange Old Notes |
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If you do not exchange your old notes in the exchange offer, you
will no longer be able to require us to register the old notes
under the Securities Act, except in the limited circumstances
provided under our registration rights agreement. In addition,
you will not be able to resell, offer to resell or otherwise
transfer the old notes unless we have registered the old notes
under the Securities Act, or unless you resell, offer to resell
or otherwise transfer them under an exemption from the
registration requirements of, or in a transaction not subject
to, the Securities Act. |
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U.S. Federal Income Tax Consequences |
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The exchange of new notes for old notes in the exchange offer
will not be a taxable event for U.S. federal income tax
purposes. Please read Certain United States Federal Income
Tax Considerations. |
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Exchange Agent |
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We have appointed The Bank of New York Mellon
Trust Company, N.A. as the exchange agent for the exchange
offer. You should direct questions and requests for assistance
and requests for additional copies of this prospectus (including
the letter of transmittal) to the exchange agent addressed as
follows: |
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Bank of New York Mellon Corporation
Corporate Trust Operations
Reorganization Unit
101 Barclay Street - 7 East
New York, NY 10286
Telephone: (212) 815-5788
Facsimile: (212) 298-1915 |
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Terms of
New Notes
The new notes will be substantially the same as the old
notes, except that the new notes are registered under the
Securities Act and will not have restrictions on transfer or
registration rights. The new notes will evidence the same debt
as the old notes, and the same indenture will govern the new
notes and the old notes. We sometimes refer to the new notes and
the old notes collectively as the notes.
The following summary contains basic information about the
new notes and is not intended to be complete. It does not
contain all the information that may be important to you. For a
more complete understanding of the new notes, please read
Description of New Notes.
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Issuer |
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Dell Inc. |
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Notes Offered |
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$600 million aggregate principal amount of
4.700% Notes due 2013 |
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$500 million aggregate principal amount of
5.650% Notes due 2018 |
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$400 million aggregate principal amount of
6.500% Notes due 2038 |
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Interest Rates |
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4.700% for the Notes due 2013 |
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5.650% for the Notes due 2018 |
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6.500% for the Notes due 2038 |
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Interest Payment Dates |
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April 15 and October 15 of each year, beginning October 15,
2008 |
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Maturity Date |
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April 15, 2013 for the Notes due 2013 |
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April 15, 2018 for the Notes due 2018 |
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April 15, 2038 for the Notes due 2038 |
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Ranking |
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The new notes will be: |
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our general unsecured
obligations;
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pari passu in right of
payment with all of our existing and future unsecured senior
indebtedness;
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effectively junior to our
secured indebtedness up to the value of the collateral securing
such indebtedness; and
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senior in right of payment
to any of our future subordinated indebtedness.
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The notes will effectively rank junior to all indebtedness and
other liabilities, including trade payables, of our subsidiaries
with respect to the assets of those subsidiaries. In the event
of bankruptcy, liquidation, or reorganization of any of these
subsidiaries, the subsidiaries will pay the holders of their
debt and other obligations, including trade creditors, before
they will be able to distribute any of their assets to us. |
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See Capitalization, Note 2 of Notes to
Consolidated Financial Statements for the year ended
February 1, 2008 (Annual Consolidated Financial
Statements) and Note 12 of Notes to Condensed
Consolidated Financial Statements for the three and six month
periods ended August 1, 2008 (Quarterly Condensed
Consolidated Financial Statements) for more information
regarding our indebtedness. |
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Optional Redemption |
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We may redeem the notes, in whole or in part, at any time and
from time to time at 100% of the principal amount plus the
make-whole premium described under the heading
Description of New Notes - Optional Redemption. |
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Certain Covenants |
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The indenture governing the notes contains covenants that, among
other things, limits our ability to: |
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create certain liens;
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enter into sale and
lease-back transactions; and
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consolidate or merge with,
or convey, transfer or lease all or substantially all of our
assets to, another person.
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However, each of these covenants is subject to a number of
significant exceptions. You should read Description of New
Notes - Covenants for a description of these covenants. |
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Transfer Restrictions; Absence of a Public Market for the Notes |
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The new notes generally will be freely transferable, but will
also be new securities for which there will not initially be a
market. We do not intend to arrange for a trading market in the
new notes after the exchange offer, and it is therefore unlikely
that such a market will exist for the new notes. |
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Form of New Notes |
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The new notes will be represented by one or more global notes.
Each global new note will be deposited with the trustee, as
custodian for DTC. |
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Same-Day
Settlement |
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The global new notes will be shown on, and transfers of the
global new notes will be effected only through, records
maintained in book-entry form by DTC and its direct and indirect
participants. |
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The new notes are expected to trade in DTCs Same Day Funds
Settlement System until maturity or redemption. Therefore,
secondary market trading activity in the new notes will be
settled in immediately available funds. |
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Trading |
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We do not expect to list the new notes for trading on any
securities exchange. |
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Trustee, Registrar and Exchange Agent |
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The Bank of New York Mellon Trust Company, N.A. |
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Governing Law |
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The notes and the indenture relating to the notes are governed
by, and construed in accordance with, the laws of the State of
New York. |
RISK
FACTORS
An investment in the notes and participation in the exchange
offer involve significant risks. You should carefully consider
all of the information contained in this prospectus. In
particular, you should evaluate the specific risk factors set
forth under the section entitled Risk Factors.
OUR
CORPORATE OFFICES AND INTERNET ADDRESS
Our principal executive offices are located at One Dell Way,
Round Rock, Texas,
78682-2244.
Our telephone number is
(512) 728-4737.
Our website address is www.dell.com. Information contained on
our website does not constitute part of this prospectus.
6
RISK
FACTORS
In considering whether to participate in the exchange offer,
you should consider carefully all of the information that we
have included in this prospectus. In particular, you should
consider carefully the risk factors described below. The risks
set out below are not the only risks we face. If any of the
following risks occurs, our business, financial condition and
results of operations could be materially adversely affected. In
such case, you may lose all or part of your investment.
Risks
Related to the Exchange Offer
If you fail to exchange your old notes, the existing
transfer restrictions will remain in effect and the market value
of your old notes may be adversely affected because they may be
more difficult to sell.
If you fail to exchange your old notes for new notes under the
exchange offer, then you will continue to be subject to the
existing transfer restrictions on the old notes. In general, the
old notes may not be offered or sold unless they are registered
or exempt from registration under the Securities Act and
applicable state securities laws. Except in connection with this
exchange offer or as required by the registration rights
agreement that we entered into when we issued the old notes, we
do not intend to register resales of the old notes.
The tender of old notes under the exchange offer will reduce the
principal amount of the currently outstanding old notes. Due to
the corresponding reduction in liquidity, this may have an
adverse effect upon, and increase the volatility of, the market
price of any currently outstanding old notes that you continue
to hold following completion of the exchange offer.
Risks
Related to Our Business
Declining general economic, business, or industry
conditions may cause reduced net revenue.
We are a global company with customers in virtually every
business and industry. Recently, concerns over inflation, energy
costs, geopolitical issues, the availability and cost of credit,
the U.S. mortgage market and a declining real estate market
in the U.S. have contributed to increased volatility and
diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and
consumer confidence and increased unemployment, have
precipitated an economic slowdown and fears of a possible
recession. If the economic climate in the U.S. or abroad
continues to deteriorate, customers or potential customers could
reduce or delay their technology investments, which could impact
our ability to manage inventory levels, collect customer
receivables, and ultimately decrease our net revenue and
profitability.
Failure to reestablish a cost advantage may result in
reduced market share, revenue, and profitability.
Our success has historically been based on our ability to
profitably offer products at a lower price than our competitors.
However, we compete with many companies globally in all aspects
of our business. If our increasing reliance on third-party
original equipment manufacturers, original design manufacturing
partnerships, and manufacturing outsourcing relationships fails
to generate cost efficiencies, our profitability could be
adversely impacted. Our profitability is also affected by our
ability to negotiate favorable pricing with our vendors,
including vendor rebates, marketing funds, and other vendor
funding. Because these supplier negotiations are continuous and
reflect the ongoing competitive environment, the variability in
timing and amount of incremental vendor discounts and rebates
can affect our profitability. An inability to reestablish our
cost advantage or determine alternative means to deliver value
to our customers may adversely affect our market share, revenue,
and profitability.
Our ability to generate substantial
non-U.S. net
revenue faces many additional risks and uncertainties.
Sales outside the U.S. accounted for approximately 47% of
our consolidated net revenue in Fiscal 2008. Our future growth
rates and success are dependent on continued growth outside the
U.S., including the key developing countries of Brazil, Russia,
India, and China (BRIC). Our international
operations face many risks and uncertainties, including varied
local economic and labor conditions, political instability, and
unexpected changes in the regulatory environment, trade
protection measures, tax laws (including U.S. taxes on
foreign operations),
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copyright levies, and foreign currency exchange rates. Any of
these factors could adversely affect our operations and
profitability.
Our profitability may be affected by our product,
customer, and geographic sales mix and by seasonal sales
trends.
Our profit margins vary among products, customers, and
geographies. In addition, our business is subject to certain
seasonal sales trends. For example, sales to government
customers (particularly the U.S. federal government) are
typically stronger in our third fiscal quarter, sales in EMEA
are often weaker in our third fiscal quarter, and consumer sales
are typically strongest during our fourth fiscal quarter. As a
result of these factors, our overall profitability for any
particular period will be affected by the mix of products,
customers, and geographies reflected in our sales for that
period, as well as by seasonality trends.
Infrastructure failures and breaches in data security
could harm our business.
We depend on our information technology and manufacturing
infrastructure to achieve our business objectives. If a problem,
such as a computer virus, intentional disruption by a third
party, natural disaster, manufacturing failure, or telephone
system failure impairs our infrastructure, we may be unable to
book or process orders, manufacture, and ship in a timely
manner, or otherwise carry on our business. An infrastructure
disruption could damage our reputation and cause us to lose
customers and revenue, result in the unintentional disclosure of
company or customer information, and require us to incur
significant expense to eliminate these problems and address
related data security concerns. The harm to our business could
be even greater if it occurs during a period of
disproportionately heavy demand.
Our failure to effectively manage a product transition
could reduce the demand for our products and the profitability
of our operations.
Continuing improvements in technology mean frequent new product
introductions, short product life cycles, and improvement in
product performance characteristics. Product transitions present
execution challenges and risks for any company. If we are unable
to effectively manage a product transition, our business and
results of operations could be unfavorably affected.
Disruptions in component or product availability could
unfavorably affect our performance.
Our manufacturing and supply chain efficiencies give us the
ability to operate with reduced levels of component and finished
goods inventories. Our financial success is partly due to our
supply chain management practices, including our ability to
achieve rapid inventory turns. Because we maintain minimal
levels of component and product inventories, a disruption in
component or product availability, such as the current industry
shortage of notebook batteries, could harm our financial
performance and our ability to satisfy customer needs.
Our reliance on vendors creates risks and
uncertainties.
Our manufacturing process requires a high volume of quality
components from third-party suppliers. Defective parts received
from these suppliers could reduce product reliability and harm
the reputation of our products. Reliance on suppliers subjects
us to possible industry shortages of components and reduced
control over delivery schedules (which can harm our
manufacturing efficiencies), as well as increases in component
costs (which can harm our profitability).
We could experience manufacturing interruptions, delays,
or inefficiencies if we are unable to timely and reliably
procure components and products from single-source or
limited-source suppliers.
We maintain several single-source or limited-source supplier
relationships, either because multiple sources are not available
or the relationship is advantageous due to performance, quality,
support, delivery, capacity, or price considerations. If the
supply of a critical single- or limited-source product or
component is delayed or curtailed, we may not be able to ship
the related product in desired quantities and in a timely
manner. For example, the current industry shortage of notebook
batteries could prevent us from meeting customer demand for
notebooks. Even where
8
multiple sources of supply are available, qualification of the
alternative suppliers, and establishment of reliable supplies,
could result in delays and a possible loss of sales, which could
harm operating results.
Our business is increasingly dependent on our ability to
access the capital markets.
The debt and capital markets have been experiencing extreme
volatility and disruption for more than twelve months. In recent
weeks, the volatility and disruption have reached unprecedented
levels. In some cases, the markets have exerted downward
pressure on availability of liquidity and credit capacity for
certain issuers. We are increasingly dependent on access to debt
and capital sources to provide financing for our customers and
to obtain funds in the U.S. for general corporate purposes,
including share repurchases and acquisitions. Additionally, we
have customer financing relationships with companies whose
business models rely on accessing the capital markets. The
inability of these companies to access such markets could force
us to self-fund transactions or forgo customer financing
opportunities, potentially harming our financial performance. We
believe that we will be able to obtain appropriate financing
from third parties even in light of the current market
conditions; nevertheless, changes in our credit ratings,
deterioration in our business performance, or further adverse
changes in the economy could limit our ability to obtain
financing from debt or capital sources or could adversely affect
the terms on which we may be able to obtain any such financing,
which could unfavorably affect our net revenue and
profitability. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity, Capital Commitments, and
Contractual Cash Obligations Liquidity.
We face risks relating to our internal controls.
If management is not successful in maintaining a strong internal
control environment, material weaknesses could reoccur, causing
investors to lose confidence in our reported financial
information. This could lead to a decline in our stock price,
limit our ability to access the capital markets in the future,
and require us to incur additional costs to improve our internal
control systems and procedures.
Unfavorable results of legal proceedings could harm our
business and result in substantial costs.
We are involved in various claims, suits, investigations, and
legal proceedings that arise from time to time in the ordinary
course of our business and that are not yet resolved, including
those that are set forth under Note 10 of Notes to Annual
Consolidated Financial Statements and Note 10 of Notes to
Quarterly Condensed Consolidated Financial Statements included
elsewhere in this prospectus, and additional claims may arise in
the future. Litigation is inherently unpredictable. Regardless
of the merit of the claims, litigation may be both
time-consuming and disruptive to our business. Therefore, we
could incur judgments or enter into settlements of claims that
could adversely affect our operating results or cash flows in a
particular period. For example, we could be exposed to
enforcement or other actions with respect to the continuing
investigation into certain accounting and financial reporting
matters being conducted by the SEC. In addition, if any
infringement or other intellectual property claim made against
us by any third party is successful, or if we fail to develop
non-infringing technology or license the proprietary rights on
commercially reasonable terms and conditions, our business,
operating results, and financial condition could be materially
and adversely affected.
The acquisition of other companies may present new
risks.
We have begun to acquire companies as a part of our overall
growth strategy. These acquisitions may involve significant new
risks and uncertainties, including distraction of management
attention away from our current business operations,
insufficient new revenue to offset expenses, inadequate return
of capital, integration challenges, new regulatory requirements,
and issues not discovered in our due diligence process. No
assurance can be given that such acquisitions will be successful
and will not adversely affect our profitability or operations.
Failure to properly manage the distribution of our
products and services may result in reduced revenue and
profitability.
We use a variety of distribution methods to sell our products
and services, including directly to customers and through select
retailers and third-party value-added resellers. As we sell
through an increasing number of indirect channels, inventory
management becomes more challenging as successful demand
forecasting becomes
9
more difficult. Our inability to properly manage and balance
inventory levels and potential conflicts among these various
distribution methods could harm our operating results.
If our cost cutting measures are not successful, we may
become less competitive.
A variety of factors could prevent us from achieving our goal of
better aligning our product and service offerings and cost
structure with customer needs in the current business
environment through reducing our operating expenses; reducing
total costs in procurement, product design, and transformation;
simplifying our structure; and eliminating redundancies. For
example, we may experience delays in the anticipated timing of
activities related to our cost savings plans and higher than
expected or unanticipated costs to implement them. As a result,
we may not achieve our expected costs savings in the time
anticipated, or at all. In such case, our results of operations
and profitability may be negatively impaired, making us less
competitive and potentially causing us to lose market share.
Failure to effectively hedge our exposure to fluctuations
in foreign currency exchange rates and interest rates could
unfavorably affect our performance.
We utilize derivative instruments to hedge our exposure to
fluctuations in foreign currency exchange rates and interest
rates. Some of these instruments and contracts may involve
elements of market and credit risk in excess of the amounts
recognized in our financial statements.
Our continued business success may depend on obtaining
licenses to intellectual property developed by others on
commercially reasonable and competitive terms.
If we or our suppliers are unable to obtain desirable technology
licenses, we may be prevented from marketing products; could be
forced to market products without desirable features; or could
incur substantial costs to redesign products, defend legal
actions, or pay damages. While our suppliers may be
contractually obligated to indemnify us against such expenses,
those suppliers could be unable to meet their obligations. In
addition, our operating costs could increase because of
copyright levies or similar fees by rights holders and
collection agencies in European and other countries. For a
description of potential claims related to copyright levies, see
Note 10 of Notes to Annual Consolidated Financial
Statements and Note 10 of Notes to Quarterly Condensed
Consolidated Financial Statements included elsewhere in this
prospectus.
Our success depends on our ability to attract, retain, and
motivate our key employees.
We rely on key personnel to support anticipated continued rapid
international growth and increasingly complex product and
service offerings. There can be no assurance that we will be
able to attract, retain, and motivate the key professional,
technical, marketing, and staff resources we need.
Loss of government contracts could harm our
business.
Government contracts are subject to future funding that may
affect the extension or termination of programs and are subject
to the right of the government to terminate for convenience or
non-appropriation. In addition, if we violate legal or
regulatory requirements, the government could suspend or disbar
us as a contractor, which would unfavorably affect our net
revenue and profitability.
The expiration of tax holidays or favorable tax rate
structures could result in an increase of our effective tax rate
in the future.
Portions of our operations are subject to a reduced tax rate or
are free of tax under various tax holidays that expire in whole
or in part during Fiscal 2010 through Fiscal 2021. Many of these
holidays may be extended when certain conditions are met. If
they are not extended, then our effective tax rate would
increase in the future. See Note 3 of Notes to Annual
Consolidated Financial Statements included elsewhere in this
prospectus.
Current environmental laws, or laws enacted in the future,
may harm our business.
Our operations are subject to environmental regulation in all of
the areas in which we conduct business. Our product design and
procurement operations must comply with new and future
requirements relating to the materials
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composition, energy efficiency and collection, recycling,
treatment, and disposal of our electronics products, including
restrictions on lead, cadmium, and other substances. If we fail
to comply with the rules and regulations regarding the use and
sale of such regulated substances, we could be subject to
liability. While we do not expect that the impact of these
environmental laws and other similar legislation adopted in the
U.S. and other countries will have a substantial
unfavorable impact on our business, the costs and timing of
costs under environmental laws are difficult to predict.
Armed hostilities, terrorism, natural disasters, or public
health issues could harm our business.
Armed hostilities, terrorism, natural disasters, or public
health issues, whether in the U.S. or abroad, could cause
damage or disruption to us, our suppliers or customers, or could
create political or economic instability, any of which could
harm our business. These events could cause a decrease in demand
for our products, could make it difficult or impossible for us
to deliver products or for our suppliers to deliver components,
and could create delays and inefficiencies in our supply chain.
Risks
Related to the Notes
Despite our current levels of debt, we may still incur
substantially more debt and increase the risks associated with
our proposed leverage.
The provisions contained or to be contained in the agreements
relating to our indebtedness do not completely prohibit our
ability to incur additional indebtedness and the amount of
indebtedness that we could incur could be substantial.
Accordingly, we or our subsidiaries could incur significant
additional indebtedness in the future, much of which could
constitute secured or senior indebtedness. If we incur any
additional debt that ranks equally with the notes, the holders
of that debt will be entitled to share ratably with the holders
of these notes in any proceeds distributed in connection with
any bankruptcy, liquidation, reorganization or similar
proceedings. If new debt is added to our current debt levels,
the related risks that we now face could intensify.
Effective subordination of the notes may reduce amounts
available for payment of the notes.
The notes are unsecured. Accordingly, the notes will effectively
rank junior to all of our secured obligations. In the event of
bankruptcy, liquidation or similar proceeding, or if payment
under any secured obligation is accelerated, claims of any
secured creditors for the assets securing the obligation will be
prior to any claim of the holders of the notes for these assets.
After the claims of the secured creditors are satisfied, there
may not be assets remaining to satisfy our obligations under the
notes. The indenture governing the notes permits us and our
subsidiaries to incur secured debt under specified circumstances.
The notes are not guaranteed by any of our subsidiaries.
Accordingly, the notes effectively will also be subordinated to
the unsecured indebtedness and other liabilities of our
subsidiaries. Our subsidiaries are separate legal entities that
have no obligation to pay any amounts due under the notes or to
make any funds available therefor, whether by dividends, loans
or other payments. Except to the extent that we are a creditor
with recognized claims against our other subsidiaries, all
claims of creditors (including trade creditors) and holders of
preferred stock, if any, of our other subsidiaries will have
priority with respect to the assets of such subsidiaries over
our claims (and therefore the claims of our creditors, including
holders of the notes). As of August 1, 2008, our
subsidiaries had approximately $11.4 billion of
liabilities, including trade payables.
Changes in our credit ratings may adversely affect the
value of the notes.
As of April 14, 2008, the notes are rated A2, A- and A by
Moodys Investors Service, Inc., Standard &
Poors Ratings Service and Fitch Ratings, respectively, in
each case with a stable outlook. Such ratings are limited in
scope, and do not address all material risks relating to an
investment in the notes, but rather reflect only the view of
each rating agency at the time the rating is issued. An
explanation of the significance of such rating may be obtained
from such rating agency. There can be no assurance that such
credit ratings will remain in effect for any given period of
time or that such ratings will not be lowered, suspended or
withdrawn entirely by the rating agencies, if, in each rating
agencys judgment, circumstances so warrant. Actual or
anticipated changes or downgrades in our credit
11
ratings, including any announcement that our ratings are under
further review for a downgrade, could affect the market value of
the notes and increase our corporate borrowing costs.
Your ability to transfer the notes may be limited by the
absence of an active trading market, and there is no assurance
that any active trading market will develop for the
notes.
Each series of notes is a new issue of securities for which
there is no established public market. We do not intend to have
the old notes or any new notes listed on a national securities
exchange or to arrange for quotation on any automated dealer
quotation systems. Although the initial purchasers advised us,
when the old notes were issued, that they intended to make a
market in the new notes, they are not obligated to do so and
they may discontinue their market-making activities at any time
without notice. In addition, such market-making activities may
be limited during the exchange offer. Therefore, we cannot
assure you as to the development or liquidity of any trading
market for the new notes or the old notes. The liquidity of any
market for the notes will depend on a number of factors,
including:
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the number of holders of notes;
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our operating performance and financial condition;
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our ability to complete the offer to exchange the old notes for
the new notes;
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the market for similar securities;
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the interest of securities dealers in making a market in the
notes; and
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prevailing interest rates.
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Historically, the market for debt securities similar to the
notes has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to
the notes. We cannot assure you that the market, if any, for the
notes will be free from similar disruptions or that any such
disruptions may not adversely affect the prices at which you may
sell your notes. Therefore, we cannot assure you that you will
be able to sell your notes at a particular time or that the
price you receive when you sell will be favorable.
12
EXCHANGE
OFFER
We sold the old notes on April 17, 2008, pursuant to the
purchase agreement dated as of April 14, 2008, by and among
us and the initial purchasers named therein. The old notes were
subsequently offered by the initial purchasers to qualified
institutional buyers pursuant to Rule 144A under the
Securities Act and to
non-U.S. persons
pursuant to Regulation S under the Securities Act.
Purpose
of the Exchange Offer
We sold the old notes in transactions that were exempt from or
not subject to the registration requirements under the
Securities Act. Accordingly, the old notes are subject to
transfer restrictions. In general, you may not offer or sell the
old notes unless either they are registered under the Securities
Act or the offer or sale is exempt from, or not subject to,
registration under the Securities Act and applicable state
securities laws.
In connection with the sale of the old notes, we entered into a
registration rights agreement with the initial purchasers of the
old notes. In that agreement, we agreed to file an exchange
offer registration statement no later than November 7,
2008. We also agreed to use our reasonable best efforts to cause
the exchange offer registration statement for the new notes to
become effective within 270 days after the closing date. We
have complied with these two agreements. Now, to satisfy our
obligations under the registration rights agreement, we are
offering holders of the old notes who are able to make certain
representations described below the opportunity to exchange
their old notes for the new notes in the exchange offer. The
exchange offer will be open for a period of at least
30 days. During the exchange offer period, we will exchange
the new notes for all old notes properly tendered and not
withdrawn before the expiration date. The new notes will be
registered under the Securities Act, and the transfer
restrictions and registration rights relating to the old notes
will not apply to the new notes.
Resale of
New Notes
Based on no-action letters of the staff of the SEC issued to
third parties, we believe that new notes may be offered for
resale, resold and otherwise transferred by you without further
compliance with the registration and prospectus delivery
provisions of the Securities Act if:
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you are not an affiliate of us within the meaning of
Rule 405 under the Securities Act;
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such new notes are acquired in the ordinary course of your
business; and
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you do not intend to participate in a distribution of the new
notes.
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The staff of the SEC, however, has not considered the exchange
offer for the new notes in the context of a no-action letter,
and the staff of the SEC may not make a similar determination as
in the no-action letters issued to these third parties.
If you tender in the exchange offer with the intention of
participating in any manner in a distribution of the new notes,
you
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cannot rely on such interpretations by the staff of the
SEC; and
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must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a
secondary resale transaction.
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Unless an exemption from registration is otherwise available,
any securityholder intending to distribute new notes should be
covered by an effective registration statement under the
Securities Act. The registration statement should contain the
selling securityholders information required by
Item 507 of
Regulation S-K
under the Securities Act.
This prospectus may be used for an offer to resell, resale or
other transfer of new notes only as specifically described in
this prospectus. If you are a broker-dealer, you may participate
in the exchange offer only if you acquired the old notes as a
result of market-making activities or other trading activities.
Each broker-dealer that receives new notes for its own account
in exchange for old notes, where such old notes were acquired by
such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge by way of the
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letter of transmittal that it will deliver this prospectus in
connection with any resale of the new notes. Please read the
section captioned Plan of Distribution for more
details regarding the transfer of new notes.
Terms of
the Exchange Offer
Subject to the terms and conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange
any old notes properly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the expiration date of
the exchange offer. We will issue new notes of each series in
principal amounts equal to the principal amounts of old notes of
each such series surrendered in the exchange offer and we will
deliver the new notes promptly after the expiration date. Old
notes may be tendered only for new notes and only in
denominations of $2,000 and integral multiples of $1,000 in
excess thereof.
The exchange offer is not conditioned upon any minimum aggregate
principal amount of old notes being tendered in the exchange
offer.
As of the date of this prospectus, $600 million in
aggregate principal amount of 4.700% Notes due 2013,
$500 million in aggregate principal amount of
5.650% Notes due 2018 and $400 million in aggregate
principal amount of 6.500% Notes due 2038 representing old
notes are outstanding. This prospectus is being sent to DTC, the
sole registered holder of the old notes, and to all persons that
we can identify as beneficial owners of the old notes. There
will be no fixed record date for determining registered holders
of old notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the
provisions of the registration rights agreement, the applicable
requirements of the Securities Act and the Securities Exchange
Act of 1934, as amended, or the Exchange Act, and
the rules and regulations of the SEC. Old notes whose holders do
not tender for exchange in the exchange offer will remain
outstanding and continue to accrue interest. These old notes
will be entitled to the rights and benefits such holders have
under the indenture relating to the notes and the registration
rights agreement.
We will be deemed to have accepted for exchange properly
tendered old notes when we have given oral or written notice of
the acceptance to the exchange agent and complied with the
applicable provisions of the registration rights agreement. The
exchange agent will act as agent for the tendering holders for
the purposes of receiving the new notes from us.
If you tender old notes in the exchange offer, you will not be
required to pay brokerage commissions or fees or, subject to the
letter of transmittal, transfer taxes with respect to the
exchange of old notes. We will pay all charges and expenses,
other than certain applicable taxes described below, in
connection with the exchange offer. Please read
Fees and Expenses for more details regarding fees and
expenses incurred in connection with the exchange offer.
We will return any old notes that we do not accept for exchange
for any reason, subject to the conditions of the exchange offer,
without expense to their tendering holders promptly after the
expiration or termination of the exchange offer.
Expiration
Date
The exchange offer will expire at 5:00 p.m., New York City
time,
on ,
2008, unless, in our sole discretion, we extend it.
Extensions,
Delays in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or various times, to
extend the period of time during which the exchange offer is
open. We may delay acceptance of any old notes by giving oral or
written notice of such extension to their holders at any time
until the exchange offer expires or terminates. During any such
extensions, all old notes previously tendered will remain
subject to the exchange offer, and we may accept them for
exchange.
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To extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the
holders of old notes of the extension via a press release issued
no later than 9:00 a.m., New York City time, on the
business day after the previously scheduled expiration date.
If any of the conditions described below under
Conditions to the Exchange Offer have not been satisfied,
we reserve the right, in our sole discretion
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to delay accepting for exchange any old notes;
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to extend the exchange offer; or
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to terminate the exchange offer
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by giving oral or written notice of such delay, extension or
termination to the exchange agent. Subject to the terms of the
registration rights agreement, we also reserve the right to
amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or
amendment will be followed promptly by oral or written notice
thereof to holders of the old notes. If we amend the exchange
offer in a manner that we determine to constitute a material
change, we will promptly disclose such amendment by means of a
prospectus supplement. The prospectus supplement will be
distributed to holders of the old notes. Depending upon the
significance of the amendment and the manner of disclosure to
holders, we will extend the exchange offer if it would otherwise
expire during such period. If an amendment constitutes a
material change to the exchange offer, including the waiver of a
material condition, we will extend the exchange offer, if
necessary, to remain open for at least five business days after
the date of the amendment. In the event of any increase or
decrease in the consideration we are offering for the old notes
or in the percentage of old notes being sought by us, we will
extend the exchange offer to remain open for at least 10
business days after the date we provide notice of such increase
or decrease to the registered holders of old notes.
Conditions
to the Exchange Offer
We will not be required to accept for exchange, or exchange any
new notes for, any old notes if the exchange offer, or the
making of any exchange by a holder of old notes, would violate
applicable law or any applicable interpretation of the staff of
the SEC or would be impaired by any action or proceeding that
has been instituted or is reasonably likely to be instituted in
any court or before any government agency with respect to the
exchange offer. Similarly, we may terminate the exchange offer
as provided in this prospectus before accepting old notes for
exchange in the event of such a potential violation.
We will not be obligated to accept for exchange the old notes of
any holder that has not made to us the representations described
under Procedures for Tendering and Plan
of Distribution and such other representations as may be
reasonably necessary under applicable SEC rules, regulations or
interpretations to allow us to use an appropriate form to
register the new notes under the Securities Act.
Additionally, we will not accept for exchange any old notes
tendered, and will not issue new notes in exchange for any such
old notes, if at such time any stop order has been threatened or
is in effect with respect to the exchange offer registration
statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture
Act of 1939.
We expressly reserve the right to amend or terminate the
exchange offer, and to reject for exchange any old notes not
previously accepted for exchange, upon the occurrence of any of
the conditions to the exchange offer specified above. We will
promptly give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the
old notes.
These conditions are for our sole benefit, and we may assert
them or waive them in whole or in part at any time or at various
times prior to the expiration of the exchange offer in our sole
discretion. If we fail at any time to exercise any of these
rights, this failure will not mean that we have waived our
rights. Each such right will be deemed an ongoing right that we
may assert at any time or at various times prior to the
expiration of the exchange offer.
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Procedures
for Tendering
To participate in the exchange offer, you must properly tender
your old notes to the exchange agent as described below. We will
only issue new notes in exchange for old notes that you timely
and properly tender. Therefore, you should allow sufficient time
to ensure timely delivery of the old notes, and you should
follow carefully the instructions on how to tender your old
notes. It is your responsibility to properly tender your old
notes. We have the right to waive any defects. However, we are
not required to waive defects, and neither we nor the exchange
agent is required to notify you of any defects in your tender.
If you have any questions or need help in exchanging your old
notes, please call the exchange agent whose address and phone
number are described in the letter of transmittal included
herewith.
All of the old notes were issued in book-entry form, and all of
the old notes are currently represented by global certificates
registered in the name of Cede & Co., the nominee of
DTC. We have confirmed with DTC that the old notes may be
tendered using ATOP. The exchange agent will establish an
account with DTC for purposes of the exchange offer promptly
after the commencement of the exchange offer, and DTC
participants may electronically transmit their acceptance of the
exchange offer by causing DTC to transfer their old notes to the
exchange agent using the ATOP procedures. In connection with the
transfer, DTC will send an agents message to
the exchange agent. The agents message will state that DTC
has received instructions from the participant to tender old
notes and that the participant agrees to be bound by the terms
of the letter of transmittal.
By using the ATOP procedures to exchange old notes, you will not
be required to deliver a letter of transmittal to the exchange
agent. However, you will be bound by its terms just as if you
had signed it.
There is no procedure for guaranteed late delivery of the old
notes.
Each broker-dealer that receives new notes for its own account
in exchange for old notes, where such old notes were acquired by
such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such new notes.
Please read Plan of Distribution.
Determinations Under the Exchange Offer. We will
determine in our sole discretion all questions as to the
validity, form, eligibility, time of receipt, acceptance of
tendered old notes and withdrawal of tendered old notes. Our
determination will be final and binding. We reserve the absolute
right to reject any old notes not properly tendered or any old
notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any
defect, irregularities or conditions of tender as to particular
old notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless
waived, all defects or irregularities in connection with tenders
of old notes must be cured within such time as we shall
determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of old notes, neither we,
the exchange agent nor any other person will incur any liability
for failure to give such notification. Tenders of old notes will
not be deemed made until such defects or irregularities have
been cured or waived. Any old notes received by the exchange
agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned
to the tendering holder promptly following the expiration date
of the exchange.
When We Will Issue New Notes. In all cases, we will issue
new notes for old notes that we have accepted for exchange under
the exchange offer only after the exchange agent receives, prior
to 5:00 p.m., New York City time, on the expiration date:
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a book-entry confirmation of such old notes into the exchange
agents account at DTC; and
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a properly transmitted agents message.
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Return of Old Notes Not Accepted or Exchanged. If we do
not accept any tendered old notes for exchange or if old notes
are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or non-exchanged old notes
will be returned without expense to their tendering holder. Such
non-exchanged old notes will be credited to an account
maintained with DTC. These actions will occur promptly after the
expiration or termination of the exchange offer.
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Your Representations to Us. By agreeing to be bound by
the letter of transmittal, you will represent to us that, among
other things:
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any new notes that you receive will be acquired in the ordinary
course of your business;
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you have no arrangement or understanding with any person or
entity to participate in the distribution (within the meaning of
the federal securities laws) of the new notes;
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you are not engaged in and do not intend to engage in the
distribution (within the meaning of the federal securities laws)
of the new notes;
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if you are a broker-dealer that will receive new notes for your
own account in exchange for old notes, you acquired those old
notes as a result of market-making activities or other trading
activities and you will deliver this prospectus, as required by
law, in connection with any resale of the new notes; provided,
however, that by acknowledging that you will deliver, and by
delivering, a copy of this prospectus, you will not be deemed to
admit that you are an underwriter within the meaning of the
Securities Act;
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you are not an affiliate, as defined in
Rule 405 under the Securities Act, of us; and
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you are not acting on behalf of any person or entity who could
not truthfully make the statements set forth above.
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Withdrawal
of Tenders
Except as otherwise provided in this prospectus, you may
withdraw your tender at any time prior to 5:00 p.m., New
York City time, on the expiration date of the exchange offer.
For a withdrawal to be effective you must comply with the
appropriate ATOP procedures. Any notice of withdrawal must
specify the name and number of the account at DTC to be credited
with withdrawn old notes and otherwise comply with the ATOP
procedures.
We will determine all questions as to the validity, form,
eligibility and time of receipt of a notice of withdrawal. Our
determination shall be final and binding on all parties. We will
deem any old notes so withdrawn not to have been validly
tendered for exchange for purposes of the exchange offer.
Any old notes that have been tendered for exchange but that are
not exchanged for any reason will be credited to an account
maintained with DTC for the old notes. This return or crediting
will take place promptly after withdrawal, rejection of tender,
expiration or termination of the exchange offer. You may
retender properly withdrawn old notes by following the
procedures described under Procedures for
Tendering above at any time on or prior to the expiration
date of the exchange offer.
Fees and
Expenses
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, we may make
additional solicitation by telegraph, telephone or in person by
our officers and regular employees and those of our affiliates.
We have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to broker-dealers
or others soliciting acceptances of the exchange offer. We will,
however, pay the exchange agent reasonable and customary fees
for its services and reimburse it for its related reasonable
out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with
the exchange offer. They include:
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SEC registration fees;
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fees and expenses of the exchange agent and trustee;
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accounting and legal fees and printing costs; and
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related fees and expenses.
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Transfer
Taxes
We will pay all transfer taxes, if any, applicable to the
exchange of old notes under the exchange offer. Each tendering
holder, however, will be required to pay any transfer taxes,
whether imposed on the registered holder or any other person, if
a transfer tax is imposed for any reason other than the exchange
of old notes under the exchange offer.
Consequences
of Failure to Exchange
If you do not exchange your old notes for new notes under the
exchange offer, the old notes you hold will continue to be
subject to the existing restrictions on transfer. In general,
you may not offer or sell the old notes except under an
exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not
intend to register old notes under the Securities Act unless the
registration rights agreement requires us to do so.
Accounting
Treatment
We will record the new notes in our accounting records at the
same carrying value as the old notes. This carrying value is the
aggregate principal amount of the old notes, less a discount of
$2 million received from the issuance of the old notes, as
reflected in our accounting records on the date of exchange.
Accordingly, we will not recognize any gain or loss for
accounting purposes in connection with the exchange offer, other
than the recognition of the fees and expenses of the offering as
stated under Fees and Expenses.
Other
Participation in the exchange offer is voluntary, and you should
consider carefully whether to accept. You are urged to consult
your financial and tax advisors in making your own decision on
what action to take.
We may in the future seek to acquire untendered old notes in
open market or privately negotiated transactions, through
subsequent exchange offers or otherwise. We have no present
plans to acquire any old notes that are not tendered in the
exchange offer or to file a registration statement to permit
resales of any untendered old notes.
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DESCRIPTION
OF NEW NOTES
The new notes, consisting of up to $600 million aggregate
principal amount of our 4.700% Notes due 2013, up to
$500 million aggregate principal amount of our
5.650% Notes due 2018 and up to $400 million aggregate
principal amount of our 6.500% Notes due 2038 will be
issued under an indenture (the Indenture), dated as
of April 17, 2008, between the Company and The Bank of New
York Mellon Trust Company, N.A., as trustee (the
Trustee), which is filed as an exhibit to the
registration statement of which this prospectus is a part. See
Available Information. The terms of the notes
include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939,
as amended (the Trust Indenture Act). The
following description is only a summary of the material
provisions of the Indenture and the new notes and does not
purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the
Indenture and the new notes, including the definitions therein
of certain terms. This description may not contain all
information that you may find useful. You should read the
Indenture and the new notes because they, not this description,
define your rights as holders of these new notes. You may
request copies of these agreements at our address set forth
under the heading Available Information. Certain
terms used in this description are defined under the subheading
Definitions. Capitalized terms used and
not defined in this summary have the meanings specified in the
Indenture. References to the Company,
we, us and our in this
section of the prospectus are only to Dell Inc. and not to any
of its Subsidiaries.
We are offering the new notes in exchange for old notes, which
were issued under the Indenture in a transaction not subject to
the registration requirements of the Securities Act, in order to
satisfy our obligations under the registration rights agreement
entered into in connection with that previous transaction.
The new notes of each series will be treated as a single class
with any old notes of such series that remain outstanding after
the completion of the exchange offer. If the exchange offer is
consummated, holders of old notes who do not exchange their old
notes for new notes will vote together with the holders of the
applicable series of new notes for all relevant purposes under
the Indenture. In that regard, the Indenture requires that
certain actions by the holders under the Indenture (including
acceleration after an Event of Default) must be taken, and
certain rights must be exercised, by holders of specified
minimum percentages of the aggregate principal amount of all
outstanding notes issued under the Indenture. In determining
whether holders of the requisite percentage of aggregate
principal amount of notes have given any notice, consent or
waiver or taken any other action permitted under the Indenture,
any old notes of any series that remain outstanding after the
exchange offer will be aggregated with the new notes of such
series, and the holders of these old notes and new notes will
vote together as a single series for all such purposes.
Accordingly, all references in this Description of New Notes to
specified percentages in aggregate principal amount of a series
of the outstanding notes mean, at any time after the exchange
offer for the old notes is consummated, such percentage in
aggregate principal amount of such old notes and the new notes
of the applicable series then outstanding.
Brief
Description of the Notes
The notes:
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are unsecured senior obligations of the Company; and
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are senior in right of payment to any future subordinated
obligations of the Company.
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General
The 4.700% Notes due 2013 will mature on April 15,
2013, the 5.650% Notes due 2018 will mature on
April 15, 2018, and the 6.500% Notes due 2038 will
mature on April 15, 2038.
Interest on the old notes has accrued from April 17, 2008.
Interest will accrue on the notes from April 17, 2008 or
from the most recent interest payment date to which interest has
been paid or provided for, payable semi-annually in arrears on
April 15 and October 15 of each year commencing on
October 15, 2008 to the person (or any predecessor) in
whose name the notes are registered at the close of business on
April 1 or October 1, as the case may be, next preceding
such interest payment date. Interest will be computed assuming a
360-day year
consisting of
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twelve
30-day
months. In the case of the new notes, all unpaid interest
accrued on old notes from April 17, 2008 will be treated as
having accrued on the new notes that are issued in exchange for
the old notes.
We are not required to make any mandatory redemption or sinking
fund payments with respect to the notes. We may at any time and
from time to time purchase notes in the open market or otherwise.
The notes will be issued only in fully registered form in
denominations of $2,000 and any greater integral multiple of
$1,000. The notes will be represented by Global Securities
registered in the name of the nominee of The Depository
Trust Company, or DTC.
The Company has appointed the Trustee at its offices at 601
Travis Street, 18th Floor, Houston, TX, 77002, to serve as
registrar and paying agent under the Indenture. No service
charge will be made for any transfer, exchange or redemption of
notes, except in certain circumstances, for any tax or other
governmental charge that may be imposed in connection therewith.
Ranking
Senior
Indebtedness versus Notes
The indebtedness evidenced by the old notes are and the new
notes will be unsecured general obligations of the Company that
rank on a parity in right of payment with all other unsecured
and unsubordinated indebtedness of the Company from time to time
outstanding. As of August 1, 2008, the Company had
$300 million of other senior indebtedness, consisting of
outstanding Senior Debentures. Secured debt and other secured
obligations of the Company will be effectively senior to the
notes to the extent of the value of the assets securing such
debt or other obligations.
Liabilities
of Subsidiaries versus Notes
Because the Company is a holding company, substantially all of
our operations are conducted through our Subsidiaries. The notes
will not be guaranteed by any of our Subsidiaries, and our
obligations pursuant to the notes will not be guaranteed in the
future. See Risk FactorsRisks Related to the
NotesEffective subordination of the notes may reduce
amounts available for payment of the notes. Claims of
creditors of such Subsidiaries, including trade creditors and
creditors holding indebtedness or guarantees issued by such
Subsidiaries, and claims of preferred stockholders of such
Subsidiaries generally will have priority with respect to the
assets and earnings of such Subsidiaries over the claims of our
creditors, including holders of the notes. Accordingly, the
notes will be effectively subordinated to creditors (including
trade creditors) and preferred stockholders, if any, of our
Subsidiaries.
As of August 1, 2008, our Subsidiaries had approximately
$11.4 billion of liabilities, including trade payables. The
Indenture does not restrict the ability of our Subsidiaries to
incur indebtedness.
Issuance
of Additional Notes
The Company may, without the consent of the holders, increase
the principal amount of either of the series of notes by issuing
additional notes of such series in the future on the same terms
and conditions, except for any differences in the issue price
and interest accrued prior to the issue date of the additional
notes, and with the same CUSIP number as the notes of such
series offered hereby. The notes of any of the series offered by
this prospectus and any additional notes of such series will be
treated as a single class for purposes of the Indenture,
including waivers, amendments and redemptions. Any additional
notes will be fungible for U.S. tax purposes. Unless the
context otherwise requires, for all purposes of the Indenture
and this Description of New Notes, references to the
notes include any additional notes actually issued.
Optional
Redemption
The notes will be redeemable, in whole or in part at any time,
at the Companys option, each at a make-whole
premium redemption price calculated by us equal to the
greater of:
(a) 100% of the principal amount of the notes to be
redeemed; and
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(b) the sum of the present values of the remaining
scheduled payments of principal and interest thereon (not
including any portion of such payments of interest accrued as of
the date of redemption), discounted to the date of redemption on
a semi-annual basis (assuming a
360-day year
consisting of twelve
30-day
months) at the Treasury Rate (as defined below), plus
35 basis points,
plus, in each case, accrued interest thereon to the date of
redemption. Notwithstanding the foregoing, installments of
interest on notes that are due and payable on interest payment
dates falling on or prior to a redemption date will be payable
on the interest payment date to the registered holders as of the
close of business on the relevant record date according to the
notes and the Indenture.
Comparable Treasury Issue means the United States
Treasury security selected by the Quotation Agent as having a
maturity comparable to the remaining term of the notes to be
redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to
the remaining term of such notes.
Comparable Treasury Price means, with respect to any
redemption date, (i) the average of four Reference Treasury
Dealer Quotations for such redemption date, after excluding the
highest and lowest such Reference Treasury Dealer Quotations, or
(ii) if the Quotation Agent obtains fewer than four such
Reference Treasury Dealer Quotations, the average of all such
quotations, or (iii) if only one Reference Treasury Dealer
Quotation is received, such quotation.
Quotation Agent means the Reference Treasury Dealer
appointed by the Company.
Reference Treasury Dealer means (i) Barclays
Capital Inc., Goldman, Sachs & Co. or J.P. Morgan
Securities Inc. (or their respective affiliates that are Primary
Treasury Dealers) and their respective successors; provided,
however, that if any of the foregoing shall cease to be a
primary U.S. Government securities dealer in New York City
(a Primary Treasury Dealer), the Company will
substitute therefor another Primary Treasury Dealer, and
(ii) any other Primary Treasury Dealer selected by the
Company.
Reference Treasury Dealer Quotations means, with
respect to each Reference Treasury Dealer and any redemption
date, the average, as determined by the Quotation Agent, of the
bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount)
quoted in writing to the Quotation Agent by such Reference
Treasury Dealer at 5:00 p.m., New York City time, on the
third business day preceding such redemption date.
Treasury Rate means, with respect to any redemption
date, the rate per annum equal to the semiannual equivalent
yield to maturity of the Comparable Treasury Issue, assuming a
price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
Selection
and Notice of Redemption
If we are redeeming less than all the notes at any time, the
Trustee will select notes on a pro rata basis to the
extent practicable.
We will redeem notes of $2,000 or less in whole and not in part.
We will cause notices of redemption to be mailed first-class
mail at least 30 days but not more than 60 days before
the redemption date to each holder of notes to be redeemed at
its registered address.
If any note is to be redeemed in part only, the notice of
redemption that relates to that note will state the portion of
the principal amount thereof to be redeemed. We will issue a new
note in a principal amount equal to the unredeemed portion of
the original note in the name of the holder upon cancellation of
the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date,
interest ceases to accrue on notes or portions of them called
for redemption.
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Covenants
Except as set forth below, neither the Company nor any of its
Subsidiaries will be restricted by the Indenture from:
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incurring any indebtedness or other obligation;
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paying dividends or making distributions on its capital
stock; or
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purchasing or redeeming its capital stock.
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In addition, we will not be required to maintain any financial
ratios or specified levels of net worth or liquidity or to
repurchase or redeem or otherwise modify the terms of any of the
notes upon a change in control or other events involving us or
any of our Subsidiaries which may adversely affect the
creditworthiness of the notes. Among other things, the Indenture
does not contain covenants designed to afford holders of the
notes any protections in the event of a highly leveraged or
other transaction involving us that may adversely affect holders
of the notes.
As of the date of this prospectus, the Company has a limited
amount of property that constitutes Principal
Property. The covenants in the Indenture will only apply
to Subsidiaries that own Principal Property.
The Indenture contains the following covenants:
Limitation
on Liens
The Company will not issue, incur, create, assume or guarantee,
and will not permit any Subsidiary to issue, incur, create,
assume or guarantee, any debt for borrowed money secured by a
mortgage, security interest, pledge, lien, charge or other
encumbrance (liens) upon any Principal Property of
the Company or of any Subsidiary or upon any shares of stock or
indebtedness of any Subsidiary that owns any Principal Property
(whether such Principal Property, shares or indebtedness are now
existing or owed or hereafter created or acquired) without in
any such case effectively providing concurrently with the
issuance, incurrence, creation, assumption or guaranty of any
such secured debt that the notes (together with, if the Company
shall so determine, any other indebtedness of or guarantee by
the Company or such Subsidiary ranking equally with the notes)
shall be secured equally and ratably with (or, at the option of
the Company, prior to) such secured debt. The preceding
provisions shall not require the Company to secure the notes if
the liens consist of either Permitted Liens or liens securing
excepted indebtedness (as described below).
Limitations
on Sale and Lease-Back Transactions
The Company will not, nor will it permit any Subsidiary to,
enter into any Sale and Lease-Back Transaction with respect to
any Principal Property unless (a) the Company or such
Subsidiary would be entitled to incur indebtedness secured by a
lien on the Principal Property involved in such transaction at
least equal in amount to the Attributable Debt with respect to
such Sale and Lease-Back Transaction without equally and ratably
securing the notes pursuant to the covenant described above
under Limitation on Liens, or
(b) the Company shall apply an amount equal to the
Attributable Debt with respect to such Sale and Lease-Back
Transaction within six months of such sale to the defeasance or
retirement (other than any mandatory retirement, mandatory
prepayment or sinking fund payment or by payment at maturity) of
notes or other debt for borrowed money of the Company or a
Subsidiary that matures more than one year after the creation of
such debt or to the purchase, construction or development of
other comparable property.
Excepted
Indebtedness
Notwithstanding the covenants described above under
Limitation on Liens and
Limitations on Sale and Lease-Back
Transactions, the Company or any Subsidiary will be
permitted to issue, incur, create, assume or guarantee
indebtedness secured by a lien or may enter into a Sale and
Lease-Back Transaction, in either case without regard to the
restrictions contained in the preceding two paragraphs, if the
sum of the aggregate principal amount of all such indebtedness
(or, in the case of a lien, the lesser of such principal amount
and the fair market value of the property subject to such lien,
as determined in good faith by the Companys Board of
Directors) and the
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Attributable Debt of all such Sale and Lease-Back Transactions,
in each case not otherwise permitted in the preceding two
paragraphs, does not exceed the greater of 10% of the
Consolidated Net Tangible Assets or $800 million.
Merger,
Consolidation or Sale of Assets
The Company may not consolidate with or merge with or into any
person, or convey, transfer or lease all or substantially all of
its assets, or permit any person to consolidate with or merge
into the Company, unless the following conditions have been
satisfied:
(a) either (1) the Company shall be the continuing
person in the case of a merger or (2) the resulting,
surviving or transferee person, if other than the Company (the
Successor Company), is a person (if such person is
not a corporation, then the Successor Company shall include a
corporate co-issuer of the notes) organized and existing under
the laws of the United States, any State or the District of
Columbia and shall expressly assume all the obligations of the
Company under the notes and the Indenture;
(b) immediately after giving effect to the transaction (and
treating any indebtedness that becomes an obligation of the
Successor Company or any Subsidiary of the Company as a result
of the transaction as having been incurred by the Successor
Company or the Subsidiary at the time of the transaction), no
Default, Event of Default or event that, after notice or lapse
of time, would become an Event of Default under the Indenture
would occur or be continuing; and
(c) the Company shall have delivered to the Trustee an
officers certificate and an opinion of counsel, each
stating that the consolidation, merger, transfer or lease
complies with the Indenture.
Upon any consolidation by the Company with, or merger by the
Company into, any other person or any conveyance, transfer or
lease of the properties and assets of the Company as an entirety
or substantially as an entirety as described in the preceding
paragraph, the successor person resulting from such
consolidation or into which the Company is merged or the
transferee or lessee to which such conveyance, transfer or lease
is made, will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the
Indenture, and thereafter, except in the case of a lease, the
predecessor (if still in existence) will be released from its
obligations and covenants under the Indenture and the notes.
Events of
Default
Each of the following events is an Event of Default
with respect to the notes of any series under the Indenture:
(a) the failure to pay the principal of (or premium, if
any, on) any series of the notes when due and payable;
(b) the failure to pay any interest installment on any
series of the notes when due and payable, continued for
30 days;
(c) the failure of the Company to perform any other
covenant under the Indenture (other than a covenant included in
the Indenture solely for the benefit of a series of debt
securities other than the notes), continued for 90 days
after written notice to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in
principal amount of the outstanding notes of the series; and
(d) certain events of bankruptcy, insolvency or
reorganization involving the Company.
If an Event of Default enumerated above with respect to the
notes of any series at the time outstanding shall occur and be
continuing, then either the Trustee or the holders of not less
than 25% in aggregate principal amount of the outstanding notes
of that series may declare to be due and payable immediately by
a notice in writing to the Company and to the Trustee the entire
principal amount of all the notes of that series. At any time
after such declaration of acceleration has been made, but before
a judgment or decree for payment of the money due has been
obtained by the Trustee, the holders of a majority in principal
amount of the outstanding notes of any series, by
23
written notice to the Company and the Trustee, may, in certain
circumstances, rescind and annul such declaration (except an
acceleration due to a Default in payment of the principal or
interest on notes of any series).
No holder of any notes of any series shall have any right to
institute any proceeding with respect to the Indenture or the
notes of that series or for any remedy thereunder, unless such
holder previously shall have given to the Trustee written notice
of a continuing Event of Default with respect to the notes of
that series and unless also the holders of at least 25% of the
principal amount of outstanding notes of that series shall have
made written request upon the Trustee, and have offered to the
Trustee indemnity reasonably satisfactory to it, to institute
such proceeding as trustee, and the Trustee shall not have
received direction inconsistent with such request in writing by
the holders of a majority in principal amount of outstanding
notes of that series and shall have neglected or refused to
institute such proceeding within 60 days. These limitations
do not apply, however, to a suit instituted by a holder of a
note for the enforcement of payment of the principal or interest
on such note on or after the respective due date expressed in
such note.
If a Default occurs and is continuing and is known to the
trustee, the trustee must mail to each holder notice of the
Default. Except in the case of a Default in the payment of
principal or premium, if any, or interest on any note, the
Trustee may withhold notice if the Trustee determines in good
faith that withholding notice is not opposed to the interests of
the holders.
The Company will also be required to deliver to the Trustee,
within 120 days after the end of each fiscal year, an
officers certificate indicating whether the signers of the
certificate know of any failure of the Company to comply with
all conditions and covenants of the Indenture during the
previous year.
Definitions
Attributable Debt when used in connection
with a Sale and Lease-Back Transaction involving a Principal
Property shall mean, at the time of determination, the lesser of
(a) the fair market value of property or assets involved in
the Sale and Lease-Back Transaction (as determined in good faith
by the Companys Board of Directors), (b) the present
value of the total net amount of rent required to be paid under
such lease during the remaining term thereof (including any
renewal term or period for which such lease has been extended),
discounted at the rate of interest set forth or implicit in the
terms of such lease or, if not practicable to determine such
rate, the weighted average interest rate per annum borne by the
debt securities of each series outstanding pursuant to the
Indenture compounded semi-annually, or (c) if the
obligation with respect to the Sale and Lease-Back Transaction
constitutes an obligation that is required to be classified and
accounted for as a capitalized lease for financial reporting
purposes in accordance with generally accepted accounting
principles, the amount equal to the capitalized amount of such
obligation determined in accordance with generally accepted
accounting principles and included in the financial statements
of the lessee. For purposes of the foregoing definition, rent
shall not include amounts required to be paid by the lessee,
whether or not designated as rent or additional rent, on account
of or contingent upon maintenance and repairs, insurance, taxes,
assessments, water rates and similar charges. In the case of any
lease that is terminable by the lessee upon the payment of a
penalty, such net amount shall be the lesser of the net amount
determined assuming termination upon the first date such lease
may be terminated (in which case the net amount shall also
include the amount of the penalty, but no rent shall be
considered as required to be paid under such lease subsequent to
the first date upon which it may be so terminated) or the net
amount determined assuming no such termination.
Consolidated Net Tangible Assets means, as of
any particular time, the aggregate amount of assets (less
applicable reserves and other properly deductible items) after
deducting therefrom (a) all current liabilities, except for
(1) notes and loans payable, (2) current maturities of
long-term debt and (3) current maturities of obligations
under capital leases, and (b) certain intangible assets, to
the extent included in such aggregate amount of assets, all as
set forth on the most recent consolidated balance sheet of the
Company and its consolidated Subsidiaries and computed in
accordance with generally accepted accounting principles.
Default means any event, act or condition
which is, or after notice or passage of time or both would be,
an Event of Default.
Exchange Act means the U.S. Securities
Exchange Act of 1934, as amended.
24
Issue Date means April 17, 2008, the
original date of issuance of the old notes.
Nonrecourse Obligation means indebtedness or
other obligations substantially related to (a) the
acquisition of assets not previously owned by the Company or any
Subsidiary or (b) the financing of a project involving the
development or expansion of properties of the Company or any
Subsidiary, as to which the obligee with respect to such
indebtedness or obligation has no recourse to the Company or any
Subsidiary or any assets of the Company or any Subsidiary other
than the assets which were acquired with the proceeds of such
transaction or the project financed with the proceeds of such
transaction (and the proceeds thereof).
Permitted Liens means (a) liens on
property, shares of stock, indebtedness or other assets of any
person existing at the time such person becomes a Subsidiary,
provided that such liens are not incurred in anticipation of
such person becoming a Subsidiary; (b)(i) liens on property,
shares of stock, indebtedness or other assets existing at the
time of acquisition thereof by the Company or a Subsidiary, or
liens thereon to secure the payment of all or any part of the
purchase price thereof or (ii) liens on property, shares of
stock, indebtedness or other assets to secure any indebtedness
for borrowed money incurred prior to, at the time of, or within
one year after, the latest of the acquisition thereof, or, in
the case of property, the completion of construction, the
completion of improvements or the commencement of substantial
commercial operation of such property for the purpose of
financing all or any part of the purchase price thereof, such
construction or the making of such improvements; (c) liens
to secure indebtedness owing to the Company or to a Subsidiary;
(d) liens existing at the date of the initial issuance of
the notes; (e) liens on property or other assets of a
person (which is not a Subsidiary) existing at the time such
person is merged into or consolidated with the Company or a
Subsidiary or at the time of a sale, lease or other disposition
of the properties of a person as an entirety or substantially as
an entirety to the Company or a Subsidiary; (f) liens in
favor of the United States of America or any State, territory or
possession thereof (or the District of Columbia), or any
department, agency, instrumentality or political subdivision of
the United States of America or any State, territory or
possession thereof (or the District of Columbia), to secure
partial, progress, advance or other payments pursuant to any
contract or statute or to secure any indebtedness incurred for
the purpose of financing all or any part of the purchase price
or the cost of constructing or improving the property subject to
such liens; (g) liens created in connection with a project
financed with, and created to secure, a Nonrecourse Obligation;
(h) liens on any property to secure bonds for the
construction, installation or financing of pollution control or
abatement facilities, or other forms of industrial revenue bond
financing, or indebtedness issued or guaranteed by the United
States, any State or any department, agency or instrumentality
thereof; and (i) extensions, renewals or replacements of
any lien referred to in the foregoing clauses (a) through
(h); provided, however, that any liens permitted by any of the
foregoing clauses (a) through (h) shall not extend to
or cover any property of the Company or such Subsidiary, as the
case may be, other than the property specified in such clauses
and improvements thereto.
person means any individual, corporation,
partnership, limited liability company, joint venture,
association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision
thereof or any other entity.
Principal Property means the land, land
improvements, buildings and fixtures (to the extent they
constitute real property interests) (including any leasehold
interest therein) constituting the principal corporate office,
any manufacturing plant or any manufacturing facility (whether
now owned or hereafter acquired) and the equipment located
thereon which (a) is owned by the Company or any
Subsidiary; (b) has not been determined in good faith by
the Board of Directors of the Company not to be materially
important to the total business conducted by the Company and its
Subsidiaries taken as a whole; and (c) has a net book value
on the date as of which the determination is being made in
excess of 1% of Consolidated Net Tangible Assets of the Company
as most recently determined on or prior to such date (including
for purposes of such calculation the land, land improvements,
buildings and such fixtures compromising such office, plant or
facilities, as the case may be).
Sale and Lease-Back Transaction means any
arrangement with any person providing for the leasing by the
Company or any Subsidiary of any Principal Property, which
property has been or is to be sold or transferred by the Company
or such Subsidiary to such person, other than (a) any such
transaction involving a lease for a term of not more than three
years, (b) any such transaction between the Company and a
Subsidiary or between Subsidiaries, or (c) any such
transaction executed by the time of or within one year after the
latest of the acquisition, the
25
completion of construction or improvement or the commencement of
commercial operation of such Principal Property.
Subsidiary means (a) any person of which
more than 50% of the outstanding Voting Stock is at the time
owned, directly or indirectly, by the Company or by one or more
other Subsidiaries of the Company or (b) any other person
(other than a corporation) in which the Company or one or more
other Subsidiaries of the Company directly or indirectly has
more than 50% equity ownership and power to direct the policies,
management and affairs thereof.
Voting Stock means stock that ordinarily has
voting power for the election of directors, whether at all times
or only so long as no senior class of stock has such voting
power by reason of any contingency.
Waiver,
Modification and Amendment
Subject to certain exceptions, modification and amendments of
the Indenture and the notes may be made by the Company and the
Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the outstanding notes
affected thereby (including consents obtained in connection with
a tender offer or exchange for the notes) and any past default
or compliance with any provisions may also be waived with the
consent of the holders of not less than a majority in aggregate
principal amount of the outstanding notes; provided,
however, that no such modification or amendment may, without
the consent of the holder of each outstanding note affected
thereby:
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change the stated maturity of the principal of, or installment
of interest on, any note;
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reduce the principal amount of, or the rate of interest on, any
notes;
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reduce any premium, if any, payable on the redemption of any
note or change the date on which any note may or must be
redeemed or repaid;
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change the coin or currency in which the principal of, premium,
if any, or interest on any note is payable;
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impair the right of any holder to institute suit for the
enforcement of any payment on or after the stated
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maturity of any note;
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reduce the percentage in principal amount of the outstanding
notes, the consent of whose holders is required in order to take
certain actions;
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modify any of the provisions in the Indenture regarding the
waiver of past Defaults and the waiver of certain covenants by
the holders of notes except to increase any percentage vote
required or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of
the holder of each note affected thereby; or
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modify any of the above provisions.
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Notwithstanding the preceding, the Company and the Trustee may,
without the consent of any holders, modify or amend the terms of
the Indenture and the notes with respect to the following:
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to cure any ambiguity, omission, defect or inconsistency;
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to evidence the succession of another person to the Company and
the assumption by any such successor of the obligations of the
Company as described above under
Covenants Merger, Consolidation or
Sale of Assets;
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to add any additional Events of Default;
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to add to our covenants for the benefit of holders of the notes
or to surrender any right or power conferred upon us;
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to add one or more guarantees for the benefit of holders of the
notes;
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to add collateral security with respect to the notes;
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to add or appoint a successor or separate trustee or other agent;
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26
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to provide for the issuance of the exchange notes, which will
have terms substantially identical in all material respects to
the notes (except that the transfer restrictions contained in
the notes will be modified or eliminated, as appropriate, and
there will be no registration rights), and which will be
treated, together with any outstanding notes, as a single issue
of securities;
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to provide for the issuance of any additional notes;
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to comply with any requirement in connection with the
qualification of the Indenture under the Trust Indenture
Act;
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to comply with the rules of any applicable securities depository;
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to provide for uncertificated notes in addition to or in place
of certificated notes; and
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to make any change if the change does not adversely affect the
interests of any holder of notes.
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Other amendments and modifications of the Indenture or the notes
may be made with the consent of not less than a majority of the
aggregate principal amount of the debt securities of each series
affected by the amendment or modification (voting as one class),
and the Companys compliance with any provision of the
Indenture with respect to any series of debt securities may be
waived by written notice to the Trustee by the holders of a
majority of the aggregate principal amount of the outstanding
debt securities of each series affected by the waiver (voting as
one class). If the exchange offer is consummated, holders of old
notes who do not exchange their old notes for new notes will
vote together with the holders of the new notes for all relevant
purposes under the Indenture.
The consent of the holders of the notes is not necessary under
the Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the
substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are
required to mail to holders of the notes a notice briefly
describing such amendment. However, the failure to give such
notice to all holders of the notes, or any defect therein, will
not impair or affect the validity of the amendment.
Neither the Company nor any affiliate of the Company may,
directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to
any holder for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or
the notes unless such consideration is offered to all holders
and is paid to all holders that so consent, waive or agree to
amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Transfer
The notes will be issued in registered form and will be
transferable only upon the surrender of the notes being
transferred for registration of transfer. We may require payment
of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers
and exchanges.
Satisfaction
and Discharge
When we (1) deliver to the Trustee all outstanding notes
for cancellation or (2) all outstanding notes have become
due and payable, whether at maturity or on a redemption date as
a result of the mailing of notice of redemption, and, in the
case of clause (2), we irrevocably deposit with the Trustee
funds sufficient to pay at maturity or upon redemption all
outstanding notes, including interest thereon to maturity or
such redemption date, and if in either case we pay all other
sums payable under the Indenture by us, then the Indenture
shall, subject to certain exceptions, cease to be of further
effect.
Defeasance
and Covenant Defeasance
The Indenture provides that we may elect either (1) to
defease and be discharged from any and all obligations with
respect to the notes (except for, among other things, certain
obligations to register the transfer or exchange of the notes,
to replace temporary or mutilated, destroyed, lost or stolen
notes, to maintain an office or agency with respect to the notes
and to hold moneys for payment in trust) (legal
defeasance) or (2) to be released from our
obligations to comply with the restrictive covenants under the
Indenture, and any omission to comply with
27
such obligations will not constitute a Default or an Event of
Default with respect to the notes, and clause (c) under
Events of Default will no longer be
applied (covenant defeasance). Legal defeasance or
covenant defeasance, as the case may be, will be conditioned
upon, among other things, the irrevocable deposit by us with the
Trustee, in trust, of an amount in U.S. dollars, or
U.S. Government obligations, or both, applicable to the
notes which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an
amount sufficient to pay the principal or premium, if any, and
interest on the notes on the scheduled due dates therefor.
If we effect covenant defeasance with respect to the notes and
the notes are declared due and payment because of the occurrence
of any Event of Default other than under clause (c) of
Events of Default, the amount in
U.S. dollars, or U.S. Government obligations, or both,
on deposit with the Trustee will be sufficient, in the opinion
of a nationally recognized firm of independent accountants, to
pay amounts due on the notes at the time of the stated maturity
buy may not be sufficient to pay amounts due on the notes at the
time of the acceleration resulting from such Event of Default.
However, we would remain liable to make payment of such amounts
due at the time of acceleration.
To effect legal defeasance or covenant defeasance, we will be
required to deliver to the Trustee an opinion of counsel that
the deposit and related defeasance will not cause the holders
and beneficial owners of the notes to recognize income, gain or
loss for federal income tax purposes. If we elect legal
defeasance, that opinion of counsel must be based upon a ruling
from the U.S. Internal Revenue Service or a change in law
to that effect.
We may exercise our legal defeasance option notwithstanding our
prior exercise of our covenant defeasance option.
Governing
Law
The Indenture and the notes will be governed by, and construed
in accordance with, the laws of the State of New York.
Regarding
the Trustee
The Trustee is The Bank of New York Mellon Trust Company,
N.A., 601 Travis Street, 18th Floor, Houston, TX, 77002.
The Trustee provides certain corporate trust services to the
Company in the ordinary course of business and may provide such
services in the future.
The Indenture and provisions of the Trust Indenture Act
contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received by it
in respect of any such claims as security or otherwise. The
Trustee is permitted to engage in other transactions. However,
if the Trustee acquires any conflicting interest it must either
eliminate such conflict within 90 days, apply to the SEC
for permission to continue or resign.
28
USE OF
PROCEEDS
The exchange offer is intended to satisfy our obligations under
the registration rights agreement. We will not receive any cash
proceeds from the issuance of the new notes in the exchange
offer. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive old notes in a
like principal amount. The form and terms of the new notes are
substantially the same as the form and terms of the old notes,
except the new notes are not subject to certain transfer
restrictions and registration rights. Old notes surrendered in
exchange for the new notes will be retired and cancelled and
will not be reissued. Accordingly, the issuance of the new notes
will not result in any change in our outstanding indebtedness.
RATIO OF
EARNINGS TO FIXED CHARGES
The following table sets forth our historical ratios of earnings
to fixed charges for the periods indicated. This information
should be read in conjunction with our Consolidated Financial
Statements and the notes thereto included elsewhere in this
prospectus.
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Six
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Months
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Ended
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Years Ended
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August 1,
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February 1,
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February 2,
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February 3,
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January 28,
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January 30,
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2008
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2008
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2007
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2006
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2005
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2004
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Ratio of earnings to fixed charges
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33
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x
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47
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x
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49
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x
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90
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x
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128
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x
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96x
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Earnings included in the calculation of this ratio consist of
(i) our operating income, plus (ii) investment and
other income, plus (iii) our fixed charges less capitalized
interest, plus (iv) our minority interests in the income of
subsidiaries. Fixed charges included in the calculation of this
ratio consist of (i) our interest expensed, plus
(ii) our interest capitalized, plus (iii) a reasonable
estimation of the interest factor included in rental expense.
29
CAPITALIZATION
The following table sets forth a summary of our cash, cash
equivalents and investments and capitalization as of
August 1, 2008, which gives effect to the original offering
of the old notes. The issuance of the new notes will not result
in any change in our outstanding indebtedness.
We derived this table from, and it should be read in conjunction
with and is qualified in its entirety by reference to, our
Consolidated Financial Statements and notes thereto included
elsewhere in this prospectus. You should also read this table in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations.
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As of
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August 1,
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2008
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(in millions; unaudited)
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Cash, cash equivalents and investments
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$
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9,534
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Long-term debt:
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2013 Notes offered hereby
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$
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600
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2018 Notes offered hereby
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500
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2038 Notes offered hereby
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400
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Total Notes
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1,500
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Other long-term debt
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340
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Total long-term debt
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1,840
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Stockholders equity:
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Preferred stock and capital in excess of $.01 par value;
shares issued and outstanding: none
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Common stock and capital in excess of $.01 par value;
shares authorized:
7,000; shares issued: 3,332; shares outstanding: 1,960
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10,781
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Treasury stock at cost: 897 shares
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(27,488
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)
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Retained earnings
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19,599
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Accumulated other comprehensive loss
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(69
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)
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Total stockholders equity
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2,823
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Total capitalization
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$
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4,663
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30
SELECTED
FINANCIAL DATA
The consolidated balance sheet as of February 1, 2008 and
February 2, 2007 and the results of operations and cash
flows for the fiscal years ended February 1, 2008,
February 2, 2007 and February 3, 2006 and notes
thereto appear elsewhere herein. The balance sheet data as of
February 3, 2006 and the results of operations and cash
flow data for the fiscal year ended January 28, 2005 are
derived from our audited financial statements included in our
previously filed Annual Report on
Form 10-K
for Fiscal Year 2007 not included herein. The data as of and for
the six months ended August 1, 2008 and August 3, 2007
has been derived from unaudited financial statements also
appearing herein, which, in the opinion of management, include
all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results
for the unaudited interim periods. The balance sheet data as of
January 28, 2005 and the balance sheet and results of
operations and cash flow data as of and for the fiscal year
ended January 30, 2004 are derived from our unaudited
financial statements.
The following table should be read in conjunction with the
information under the caption Managements Discussion
and Analysis of Financial Condition and Results of
Operations included in this prospectus and our
Consolidated Financial Statements and notes thereto included
elsewhere in this prospectus.
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Fiscal Year Ended
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Six Months Ended
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February 1,
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February 2,
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February 3,
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January 28,
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January 30,
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August 1,
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August 3,
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2008(a)
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2007(a)
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2006(b)
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2005(c)
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2004
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2008
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2007
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(in millions, except per share data)
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Results of Operations:
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Net revenue
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$
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61,133
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$
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57,420
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$
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55,788
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$
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49,121
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$
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41,327
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$
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32,511
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$
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29,498
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Gross margin
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11,671
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9,516
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9,891
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9,018
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7,563
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5,792
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5,789
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Operating income
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3,440
|
|
|
|
3,070
|
|
|
|
4,382
|
|
|
|
4,206
|
|
|
|
3,525
|
|
|
|
1,718
|
|
|
|
1,835
|
|
Income before income taxes
|
|
|
3,827
|
|
|
|
3,345
|
|
|
|
4,608
|
|
|
|
4,403
|
|
|
|
3,711
|
|
|
|
1,861
|
|
|
|
2,009
|
|
Net income
|
|
|
2,947
|
|
|
|
2,583
|
|
|
|
3,602
|
|
|
|
3,018
|
|
|
|
2,625
|
|
|
|
1,400
|
|
|
|
1,502
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.15
|
|
|
$
|
1.50
|
|
|
$
|
1.20
|
|
|
$
|
1.02
|
|
|
$
|
0.70
|
|
|
$
|
0.67
|
|
Diluted
|
|
|
1.31
|
|
|
|
1.14
|
|
|
|
1.47
|
|
|
|
1.18
|
|
|
|
1.00
|
|
|
|
0.69
|
|
|
|
0.66
|
|
Number of weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,223
|
|
|
|
2,255
|
|
|
|
2,403
|
|
|
|
2,509
|
|
|
|
2,565
|
|
|
|
2,013
|
|
|
|
2,236
|
|
Diluted
|
|
|
2,247
|
|
|
|
2,271
|
|
|
|
2,449
|
|
|
|
2,568
|
|
|
|
2,619
|
|
|
|
2,019
|
|
|
|
2,259
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash from operating activities
|
|
$
|
3,949
|
|
|
$
|
3,969
|
|
|
$
|
4,751
|
|
|
$
|
5,821
|
|
|
$
|
4,064
|
|
|
$
|
1,251
|
|
|
$
|
1,754
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$
|
9,532
|
|
|
$
|
12,445
|
|
|
$
|
11,756
|
|
|
$
|
14,101
|
|
|
$
|
11,921
|
|
|
$
|
9,534
|
|
|
$
|
13,822
|
|
Total assets
|
|
|
27,561
|
|
|
|
25,635
|
|
|
|
23,252
|
|
|
|
23,318
|
|
|
|
19,340
|
|
|
|
28,407
|
|
|
|
28,054
|
|
Short-term borrowings
|
|
|
225
|
|
|
|
188
|
|
|
|
65
|
|
|
|
74
|
|
|
|
157
|
|
|
|
129
|
|
|
|
328
|
|
Long-term debt
|
|
|
362
|
|
|
|
569
|
|
|
|
625
|
|
|
|
662
|
|
|
|
645
|
|
|
|
1,840
|
|
|
|
378
|
|
Total stockholders equity
|
|
|
3,735
|
|
|
|
4,328
|
|
|
|
4,047
|
|
|
|
6,412
|
|
|
|
6,238
|
|
|
|
2,823
|
|
|
|
5,928
|
|
|
|
|
(a)
|
|
Results for Fiscal 2008 and Fiscal
2007 include stock-based compensation expense pursuant to
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment
(SFAS 123(R)). See Note 5 of
Notes to Consolidated Financial Statements included elsewhere in
this prospectus.
|
31
|
|
|
(b)
|
|
Results for Fiscal 2006 include
charges aggregating $421 million ($338 million of
other product charges and $83 million in selling, general
and administrative expenses) related to the cost of servicing or
replacing certain
OptiPlextm
systems that included a vendor part that failed to perform to
our specifications, workforce realignment, product
rationalizations, excess facilities, and a write-off of goodwill
recognized in the third quarter. The related tax effect of these
items was $96 million. Fiscal 2006 also includes an
$85 million income tax benefit related to a revised
estimate of taxes on the repatriation of earnings under the
American Jobs Creation Act of 2004 recognized in the second
quarter.
|
|
(c)
|
|
Results for Fiscal 2005 include an
income tax charge of $280 million related to the
repatriation of earnings under the American Jobs Creation Act of
2004 recorded in the fourth quarter.
|
32
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE: This section, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements that are
based on our current expectations. Actual results in future
periods may differ materially from those expressed or implied by
those forward-looking statements because of a number of risks
and uncertainties. For a discussion of risk factors affecting
our business and prospects, see Risk Factors and
Forward-Looking Statements. This section should be
read in conjunction with our Consolidated Financial Statements
and the notes thereto included elsewhere in this prospectus.
Overview
Our
Company
As a leading technology company, we offer a broad range of
product categories, including desktop PCs, notebooks, software
and peripherals, servers and networking products, services, and
storage. We are the number one supplier of personal computer
systems in the United States, and the number two supplier
worldwide.
We have manufacturing locations around the world and
relationships with third-party original equipment manufacturers.
This structure allows us to optimize our global manufacturing
and logistics network to best serve our global customer base. We
continue to expand our supply chain which allows us to enhance
product design and features, shorten product development cycles,
improve logistics, and lower costs, thus improving our
competitiveness.
We were founded on the core principle of a direct customer
business model which included build to order hardware for
consumer and commercial customers. The inherent velocity of this
model, which included highly efficient manufacturing and
logistics, allowed for low inventory levels and the ability to
be the industry leader in selling the most relevant technology,
at the best value, to our customers. Our direct relationships
with customers also allowed us to bring to market products that
featured customer driven innovation, thereby allowing us to be
on the forefront of changing user requirements and needs. Over
time we have expanded our business model to include a broader
portfolio of products, including services, and we have also
added new distribution channels, such as consumer retail and
value added resellers, which allow us to reach even more
customers around the world. We also offer various financing
alternatives, asset management services, and other customer
financial services for business and consumer customers. As a
part of our overall growth strategy, we have executed targeted
acquisitions to augment select areas of our business with more
products, services, and technology.
Our new distribution channels include the launch in Fiscal 2008
of our global retail initiative, offering select products in
retail stores in the Americas; Europe, Middle East, and Africa
(EMEA); and Asia Pacific-Japan (APJ). In
Fiscal 2008, we also launched PartnerDirect, a global program
that will bring our existing value-added reseller programs under
one umbrella including training, certification, deal
registration, focused sales and customer care, and a dedicated
web portal.
We continue to simplify technology and lower costs for our
customers while expanding our business opportunities.
Underpinning these goals are our core competencies of
world-class competitiveness, low cost and expense,
any-to-any
supply chain, services and solutions, and sales effectiveness.
We are currently focused on five key growth priorities which,
when coupled with our core competencies, we believe will drive
an optimal balance of long-term sustained growth, profitability,
and cash flow:
|
|
|
Global Consumer In the first quarter of
Fiscal 2009, we realigned our management and reporting structure
to focus on worldwide sales to individual consumers and
retailers as a part of an internal consolidation of our consumer
business. Our global consumer business is comprised of on-line
sales, sales over the phone, and sales through our retail
channel. The global consolidation of this business will improve
our global sales execution and coverage through better customer
alignment, targeted sales force investments in rapidly growing
countries, and improved marketing tools. We are also designing
new, innovative products with faster development cycles and
competitive features including the new Studio line of notebooks,
which allow consumers greater personalization and self
expression. Finally, we have rapidly expanded our retail
business in order to reach more consumers.
|
33
|
|
|
Enterprise In the enterprise, our solution
mission is to help companies of all sizes simplify their IT
environments. The complete solution includes servers, storage,
services, and software. At the core of this simplification
problem is complexity in IT architecture and operations
developed over decades and ineffective services models that
create unnecessary complexity and cost. We are focused on
helping customers identify and remove this unnecessary cost and
complexity. As a result of our simplify IT focus, we
have become the industry leader in server virtualization, power,
and cooling performance. We recently launched our broadest ever
lineup of virtualization solutions combining PowerEdge servers,
switches, EqualLogic SAN, along with VM Ware software enabling
the virtual cloud.
|
|
|
Notebooks Our goal is to reclaim notebook
leadership by creating the best products while shortening our
development cycle and being the most innovative developer of
notebooks. To help meet this goal, we have separated our
consumer and commercial design functions to drive greater focus
and launched several notebook products. Industry analysts expect
the sale of notebook units globally to outpace that of desktops
for the first time next year and for that trend to continue into
the future. Recently, we had the largest global product launch
in our companys history with our new E Series commercial
Latitude and Dell Precision notebooks. We expect to continue to
launch a number of new notebook products throughout the
remainder of Fiscal 2009, targeting various price and
performance bands.
|
|
|
Small and Medium Business We are focused on
providing small and medium businesses the simplest and most
complete IT solution, customized for their needs, by extending
our channel direct program (PartnerDirect) and expanding our
offerings to mid-sized businesses. We are committed to improving
our storage products and services as evidenced by our new
Building IT-as-a-Service solution, which provides businesses
with remote and lifecycle management,
e-mail
backup, and software license management.
|
|
|
Emerging countries We are focused on and
investing resources in emerging countries with an
emphasis on Brazil, Russia, India, and China, from where we
expect a majority of the worldwide growth will come in the next
four years. We are also creating custom products and services to
meet the preferences and demands of individual countries and
various regions, including the new Vostro A notebooks and
desktops designed specifically for cost sensitive growing
businesses in emerging economies.
|
We continue to invest in initiatives that will align our new and
existing products around customers needs to drive
long-term, sustainable growth, profitability, and cash flow. We
also continue to grow our business organically and through
strategic acquisitions. During the first half of Fiscal 2009, we
acquired two companies, with the larger being MessageOne, Inc.
These acquisitions are targeted to further expand our service
capabilities. During Fiscal 2008, we acquired five companies,
among which the two largest were EqualLogic, Inc.
(EqualLogic) and ASAP Software Express, Inc.
(ASAP), and we purchased CIT Group Inc.s
(CIT) 30% interest in Dell Financial Services, L.P.
(DFS). We expect to make more strategic acquisitions
in the future.
Second
Quarter of Fiscal 2009 Performance
|
|
|
|
|
Share position
|
|
n
|
|
We shipped approximately 11.5 million units, resulting in a
worldwide PC share position of 16.4%, an increase of
approximately one percentage point
year-over-year.
|
Net revenue
|
|
n
|
|
Net revenue increased 11%
year-over-year
to $16.4 billion, with unit shipments up 19%
year-over-year.
|
Operating income
|
|
n
|
|
Operating income was $819 million for the current quarter,
or 5.0% of revenue, as compared to $902 million or 6.1% of
revenue for the second quarter of Fiscal 2008.
|
Earnings per share
|
|
n
|
|
Earnings per share decreased 6% to $0.31 for the current quarter
compared to $0.33 for the second quarter of Fiscal 2008.
|
34
Fiscal
2008 Performance
|
|
|
|
|
Share position
|
|
n
|
|
We shipped 40 million units for calendar year 2007
according to IDC, resulting in a worldwide PC share position of
14.9%. After leading the worldwide PC market for the past six
years, we fell to the second position for calendar year 2007. We
lost share, both in the U.S. and internationally, as our growth
did not meet the overall PC growth. Our Global Consumer segment
continued to underperform, which slowed our overall growth in
unit shipments, revenue, and profitability. This was mainly due
to intense competitive pressure, particularly in the lower
priced desktops and notebooks where competitors offered
aggressively priced products with better product recognition and
more relevant feature sets. A slight decline in our worldwide
desktop shipments also was a factor in our losing worldwide PC
share position; worldwide desktop shipments grew 5% during
calendar year 2007.
|
Net revenue
|
|
n
|
|
Fiscal 2008 net revenue increased 6%
year-over-year
to $61.1 billion, with unit shipments up 5%
year-over-year,
as compared to Fiscal 2007 net revenue which increased 3%
year-over-year
to $57.4 billion on unit growth of 2% over Fiscal
2006 net revenue of $55.8 billion.
|
Operating income
|
|
n
|
|
Operating income was $3.4 billion for Fiscal 2008, or 5.6%
of net revenue compared to $3.1 billion for Fiscal 2007, or
5.4% of net revenue, and $4.4 billion or 7.9% of net
revenue in Fiscal 2006.
|
Net income
|
|
n
|
|
Net income was $2.9 billion for Fiscal 2008, or 4.8% of net
revenue compared to $2.6 billion for Fiscal 2007, or 4.5%
of net revenue, and $3.6 billion or 6.5% of net revenue in
Fiscal 2006.
|
Earnings per share
|
|
n
|
|
Earnings per share increased 15% to $1.31 for Fiscal 2008,
compared to $1.14 for Fiscal 2007 and $1.47 for Fiscal 2006.
|
Results
of Operations
The following tables summarize our consolidated results of
operations for the three and six month periods ended
August 1, 2008 and August 3, 2007 and each of the past
three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except per share
amounts and percentages)
|
|
|
Net revenue
|
|
$
|
16,434
|
|
|
|
100.0
|
%
|
|
$
|
14,776
|
|
|
|
100.0
|
%
|
|
$
|
32,511
|
|
|
|
100.0
|
%
|
|
$
|
29,498
|
|
|
|
100.0
|
%
|
Gross margin
|
|
|
2,827
|
|
|
|
17.2
|
%
|
|
|
2,951
|
|
|
|
19.9
|
%
|
|
|
5,792
|
|
|
|
17.8
|
%
|
|
|
5,789
|
|
|
|
19.6
|
%
|
Operating expenses
|
|
|
2,008
|
|
|
|
12.2
|
%
|
|
|
2,049
|
|
|
|
13.8
|
%
|
|
|
4,074
|
|
|
|
12.5
|
%
|
|
|
3,954
|
|
|
|
13.4
|
%
|
Operating income
|
|
|
819
|
|
|
|
5.0
|
%
|
|
|
902
|
|
|
|
6.1
|
%
|
|
|
1,718
|
|
|
|
5.3
|
%
|
|
|
1,835
|
|
|
|
6.2
|
%
|
Net income
|
|
|
616
|
|
|
|
3.7
|
%
|
|
|
746
|
|
|
|
5.1
|
%
|
|
|
1,400
|
|
|
|
4.3
|
%
|
|
|
1,502
|
|
|
|
5.1
|
%
|
Earnings per share diluted
|
|
|
0.31
|
|
|
|
N/A
|
|
|
|
0.33
|
|
|
|
N/A
|
|
|
|
0.69
|
|
|
|
N/A
|
|
|
|
0.66
|
|
|
|
N/A
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
2008(a)
|
|
|
February 2,
2007(a)
|
|
|
February 3,
2006(b)
|
|
|
|
Dollars
|
|
|
% of Revenue
|
|
|
Dollars
|
|
|
% of Revenue
|
|
|
Dollars
|
|
|
% of Revenue
|
|
|
|
(in millions, except per share amounts and percentages)
|
|
|
Net revenue
|
|
$
|
61,133
|
|
|
|
100.0
|
%
|
|
$
|
57,420
|
|
|
|
100.0
|
%
|
|
$
|
55,788
|
|
|
|
100.0
|
%
|
Gross margin
|
|
|
11,671
|
|
|
|
19.1
|
%
|
|
|
9,516
|
|
|
|
16.6
|
%
|
|
|
9,891
|
|
|
|
17.7
|
%
|
Operating expenses
|
|
|
8,231
|
|
|
|
13.5
|
%
|
|
|
6,446
|
|
|
|
11.2
|
%
|
|
|
5,509
|
|
|
|
9.8
|
%
|
Operating income
|
|
|
3,440
|
|
|
|
5.6
|
%
|
|
|
3,070
|
|
|
|
5.4
|
%
|
|
|
4,382
|
|
|
|
7.9
|
%
|
Income tax provision
|
|
|
880
|
|
|
|
1.4
|
%
|
|
|
762
|
|
|
|
1.3
|
%
|
|
|
1,006
|
|
|
|
1.8
|
%
|
Net income
|
|
|
2,947
|
|
|
|
4.8
|
%
|
|
|
2,583
|
|
|
|
4.5
|
%
|
|
|
3,602
|
|
|
|
6.5
|
%
|
Earnings per share diluted
|
|
|
1.31
|
|
|
|
N/A
|
|
|
|
1.14
|
|
|
|
N/A
|
|
|
|
1.47
|
|
|
|
N/A
|
|
|
|
(a)
|
Results for Fiscal 2008 include stock-based compensation expense
of $436 million, or $309 million ($0.14 per share) net
of tax, and results for Fiscal 2007 include stock-based
compensation expense of $368 million, or $258 million
($0.11 per share) net of tax, due to the implementation of
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment,
(SFAS 123(R)). We implemented SFAS 123(R)
using the modified prospective method effective February 4,
2006. For additional information, see Note 5 of Notes to
Annual Consolidated Financial Statements included elsewhere in
this prospectus.
|
|
(b)
|
Results for Fiscal 2006 include charges aggregating
$421 million ($338 million of other product charges
and $83 million in selling, general, and administrative
expenses) related to the cost of servicing or replacing certain
OptiPlextm
systems that include a vendor part that failed to perform to our
specifications, workforce realignment, product rationalizations,
excess facilities, and a write-off of goodwill recognized in the
third quarter. The related tax effect of these items was
$96 million. Fiscal 2006 also includes an $85 million
income tax benefit related to a revised estimate of taxes on the
repatriation of earnings under the American Jobs Creation Act of
2004 recognized in the second quarter.
|
Consolidated
Operations
Consolidated revenue grew 11% and 10%,
year-over-year,
for the second quarter and first six months of Fiscal 2009,
respectively. We grew revenue across all segments, led by Global
Consumer with 28% and 24% revenue growth
year-over-year
for the second quarter and first six months of Fiscal 2009,
respectively. APJ Commercial and EMEA Commercial also
experienced strong
year-over-year
revenue growth of 16% and 11%, respectively, for the second
quarter of Fiscal 2009, and 17% and 13%, respectively, for the
six months ending August 1, 2008, as compared to the same
period in the prior year. During the second quarter and first
six months of Fiscal 2009, we grew revenue across all major
product lines, except for desktops, as compared to the same
periods in Fiscal 2008. Our mobility products and
software & peripherals business led our product
revenue growth with
year-over-year
growth of 26% and 17%, respectively, for the second quarter of
Fiscal 2009, and
year-over-year
growth of 24% and 17%, respectively, for the first half of
Fiscal 2009. Revenue outside the U.S. comprised 47% of
consolidated revenue for the second quarter of Fiscal 2009,
compared to 45% for the same period last year. Combined Brazil,
Russia, India, and China (BRIC)
year-over-year
revenue growth was 41% on unit growth of 46% for the second
quarter of Fiscal 2009.
In general, foreign exchange spot rates experienced greater than
normal volatility
year-over-year.
The estimated impact of the weak U.S. dollar to Dell was
approximately 4%
year-over-year.
The weak dollar helped to stimulate demand as we generally pass
on foreign currency benefits to customers through lower local
currency pricing because we typically manage our business on a
U.S. dollar basis. To continue to capitalize on and
increase international growth, we are tailoring solutions to
meet specific regional needs, enhancing relationships to provide
customer choice and flexibility, and expanding into these and
other emerging countries that represent 85% of the worlds
population.
Fiscal 2008 revenue increased 6%
year-over-year
to $61.1 billion, with unit shipments up 5%
year-over-year.
Revenue grew across all segments except for Global Consumer: APJ
Commercial grew 15%; EMEA Commercial increased 15%; Americas
Commercial grew 6%; and Global Consumer decreased 6%. Revenue
outside the U.S. represented approximately 47% of Fiscal
2008 net revenue, compared to approximately 44% in the
prior year. Outside the U.S., we produced 14%
year-over-year
revenue growth for Fiscal 2008; however, our unit growth was
below the overall unit growth rate of the international PC
market. During Fiscal 2008, the U.S. dollar weakened
relative to the other principal currencies in which we transact
business; however, as a result of our
36
hedging activities, foreign currency fluctuations did not have a
significant impact on our consolidated results of operations.
Combined BRIC revenue growth during Fiscal 2008 was 27%. To
continue to capitalize on and increase international growth, we
are tailoring solutions to meet specific regional needs,
enhancing relationships to provide customer choice and
flexibility, and expanding into these and other emerging
countries that represent 85% of the worlds population.
Worldwide, all product categories grew revenue over the prior
year other than desktop PCs, which declined 1% as consumers
continue to migrate to mobility products. Desktop PC revenue in
the Global Consumer and Americas Commercial segments declined
13% and 1%
year-over-year,
respectively, as opposed to desktop PC revenue in APJ Commercial
and EMEA Commercial which increased 13% and 1% respectively.
Fiscal 2007 revenue increased 3%
year-over-year
to $57.4 billion, with unit shipments up 2%
year-over-year.
Revenue grew across the Americas Commercial, EMEA Commercial,
and APJ Commercial segments by 3%, 6%, and 12%, respectively,
while the Global Consumer segment revenue declined 5%
year-over-year.
Revenue outside the U.S. represented approximately 44% of
Fiscal 2007 net revenue, compared to approximately 41% in
the prior year. Outside the U.S., we produced 10%
year-over-year
revenue growth for Fiscal 2007. All product categories grew
revenue over the prior year periods, other than desktop PCs
which declined 8%.
Operating income decreased 9%
year-over-year
to $819 million for the second quarter of Fiscal 2009. The
decline in operating income is driven by a decline in gross
margin due to overlapping record industry-wide component cost
declines in the second quarter of Fiscal 2008, expanding our
global retail channel presence in our Global Consumer segment,
and strategic growth initiatives taken in advance of cost
improvements. The decline in gross margin was partially offset
by an improvement in operating expenses. Decline in
profitability as a percentage of revenue was most pronounced in
the results of our EMEA Commercial and Global Consumer segments.
Net income decreased 17%
year-over-year
to $616 million during the second quarter of Fiscal 2009.
Impacting net income was a decline in investment and other
income, and a slightly higher effective income tax rate.
Operating income decreased 6%
year-over-year
to $1.7 billion for the six months ending August 1,
2008. The decline in operating income is due to overlapping
record industry-wide component cost declines in the second
quarter of Fiscal 2008, expanding our global retail channel
presence in Global Consumer, and the impact of the strategic
growth initiatives mentioned above. Also impacting operating
income for the first six months of Fiscal 2009 was increased
selling, general, and administrative expense dollars, although
selling, general, and administrative expenses decreased
year-over-year
as a percentage of revenue. In addition, for the first six
months of Fiscal 2009, adjustments to correct items related to
prior periods, in the aggregate, increased income before taxes
by approximately $110 million. The two largest of these
corrections include a reversal of the excess amount of the
provision for Fiscal 2008 employee bonuses and foreign
exchange rate errors. Correcting these errors increased
operating income by $46 million and net income before taxes
by $42 million, respectively. Dell recorded the correction
of these errors in the first quarter of Fiscal 2009. For the
first half of Fiscal 2009, net income decreased 7%
year-over-year
to $1.4 billion. Net income was impacted by a decline in
investment and other income, partially offset by a slight
decrease in our effective tax rate for the first six months of
Fiscal 2009.
Operating income and net income increased 12% and 14%
year-over-year
to $3.4 billion and $2.9 billion, respectively, for
Fiscal 2008. The increased profitability was mainly a result of
strength in mobility, solid demand for enterprise products, and
a favorable component-cost environment. In Fiscal 2007 and
Fiscal 2006, operating and net income were $3.1 billion and
$2.6 billion, and $4.4 billion and $3.6 billion,
respectively. Net income for Fiscal 2006 includes an income tax
repatriation benefit of $85 million pursuant to a favorable
tax incentive provided by the American Jobs Creation Act of
2004. This tax benefit is related to the Fiscal 2006
repatriation of $4.1 billion in foreign earnings.
Our average selling price (total revenue per unit sold) during
the second quarter and first six months of Fiscal 2009 decreased
7% and 8%, respectively,
year-over-year,
which primarily resulted from our actions to increase our
presence in consumer retail and our business mix. Our recent
market strategy has been to concentrate on solutions sales to
drive a better mix of products and services, while aggressively
pricing our products to remain competitive in the marketplace.
In the second quarter and first half of Fiscal 2009, we
continued to see competitive pressure, particularly for lower
priced desktops and notebooks, as we targeted a broader range of
products and price bands. However, we were able to gain share
across all regions and major products during the second quarter
and first six
37
months of calendar 2008. We expect that this competitive pricing
environment will continue for the foreseeable future.
Our average selling price (total revenue per unit sold) in
Fiscal 2008 increased 2%
year-over-year,
which primarily resulted from our pricing strategy, compared to
a 1%
year-over-year
increase for Fiscal 2007. Our recent pricing strategy has been
to concentrate on solutions sales, realign pricing, and drive a
better mix of products and services, while aggressively pricing
our products to remain competitive in the marketplace. In Fiscal
2008, we continued to see intense competitive pressure,
particularly for lower priced desktops and notebooks, as
competitors offered aggressively priced products with better
product recognition and more relevant feature sets. As a result,
particularly in the U.S., we lost share among consumers in
notebooks and desktops, which slowed our overall growth in unit
shipments, revenue, and profitability. We expect that this
competitive pricing environment will continue for the
foreseeable future.
Revenues
by Segment
We conduct operations worldwide. Effective the first quarter of
Fiscal 2009, we combined our consumer businesses of EMEA, APJ,
and Americas International (formerly reported through Americas
Commercial) with our U.S. Consumer business and re-aligned
our management and financial reporting structure. As a result,
effective in the first quarter of Fiscal 2009, our operating
structure consisted of the following four segments: Americas
Commercial, EMEA Commercial, APJ Commercial, and Global
Consumer. Our commercial business includes sales to corporate,
government, healthcare, education, small and medium business
customers, and value-added resellers and is managed through the
Americas Commercial, EMEA Commercial, and APJ Commercial
segments. The Americas Commercial segment, which is based in
Round Rock, Texas, encompasses the U.S., Canada, and Latin
America. The EMEA Commercial segment, based in Bracknell,
England, covers Europe, the Middle East, and Africa; and the APJ
Commercial segment, based in Singapore, encompasses the Asian
countries of the Pacific Rim as well as Australia, New Zealand,
and India. The Global Consumer segment, which is based in Round
Rock, Texas, includes global sales and product development for
individual consumers and retailers around the world. We revised
previously reported operating segment information to conform to
our new operating structure in effect during the first quarter
of Fiscal 2009.
During the second half of Fiscal 2008, we began selling desktop
and notebook computers, printers, ink, and toner through retail
channels in the Americas, EMEA, and APJ in order to expand our
customer base. Our goal is to have strategic relationships with
a number of major retailers in our larger geographic regions. In
the U.S., we currently have relationships with retailers such as
Staples, Wal-Mart, and Best Buy; and in Latin America, we have
relationships with retailers, including Wal-Mart and Pontofrio.
Additionally, some of our relationships include Carphone
Warehouse, Carrefour, Tesco, and DSGi in EMEA; and in APJ, we
are working with retailers such as Gome, HiMart, Courts, and Bic
Camera. During the second quarter of Fiscal 2009, we expanded
our global retail presence, and we now reach more than 15,000
retail locations worldwide. See Note 11 of Notes to Annual
Consolidated Financial Statements and Note 11 of Notes to
Quarterly Condensed Consolidated Financial Statements included
elsewhere in this prospectus for additional information about
our operating segments.
The following tables summarize our net revenue by reportable
segment for each of the three and six months ended
August 1, 2008 and August 3, 2007 and Fiscal 2008,
2007, and 2006:
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Three Months Ended
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Six Months Ended
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August 1, 2008
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August 3, 2007
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August 1, 2008
|
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August 3, 2007
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% of
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|
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% of
|
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|
|
|
|
% of
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|
|
|
% of
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Dollars
|
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Revenue
|
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|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except
percentages)
|
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Net revenue
|
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|
|
|
|
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|
|
|
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|
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|
|
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|
|
|
|
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Americas Commercial
|
|
$
|
8,096
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|
|
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49%
|
|
|
$
|
7,680
|
|
|
|
52%
|
|
|
$
|
15,394
|
|
|
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47%
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|
|
$
|
14,931
|
|
|
|
50%
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EMEA Commercial
|
|
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3,503
|
|
|
|
21%
|
|
|
|
3,162
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|
|
|
21%
|
|
|
|
7,309
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|
|
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22%
|
|
|
|
6,479
|
|
|
|
22%
|
|
APJ Commercial
|
|
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2,054
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|
|
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13%
|
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|
|
1,765
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|
|
|
12%
|
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|
|
4,078
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|
|
|
13%
|
|
|
|
3,472
|
|
|
|
12%
|
|
Global Consumer
|
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2,781
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|
|
|
17%
|
|
|
|
2,169
|
|
|
|
15%
|
|
|
|
5,730
|
|
|
|
18%
|
|
|
|
4,616
|
|
|
|
16%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net revenue
|
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$
|
16,434
|
|
|
|
100%
|
|
|
$
|
14,776
|
|
|
|
100%
|
|
|
$
|
32,511
|
|
|
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100%
|
|
|
$
|
29,498
|
|
|
|
100%
|
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|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
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|
|
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38
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
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|
|
February 1, 2008
|
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February 2, 2007
|
|
|
February 3, 2006
|
|
|
|
|
|
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% of
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|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
|
|
|
(in millions, except
percentages)
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Americas Commercial
|
|
$
|
29,981
|
|
|
|
49%
|
|
|
$
|
28,289
|
|
|
|
49%
|
|
|
$
|
27,489
|
|
|
|
49%
|
|
EMEA Commercial
|
|
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13,607
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|
|
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22%
|
|
|
|
11,842
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|
|
|
21%
|
|
|
|
11,124
|
|
|
|
20%
|
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APJ Commercial
|
|
|
7,167
|
|
|
|
12%
|
|
|
|
6,223
|
|
|
|
11%
|
|
|
|
5,547
|
|
|
|
10%
|
|
Global Consumer
|
|
|
10,378
|
|
|
|
17%
|
|
|
|
11,066
|
|
|
|
19%
|
|
|
|
11,628
|
|
|
|
21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
61,133
|
|
|
|
100%
|
|
|
$
|
57,420
|
|
|
|
100%
|
|
|
$
|
55,788
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Americas Commercial Americas
Commercial revenue increased 5% with unit shipments up by 7%
year-over-year
for the second quarter of Fiscal 2009. Growth in Latin America
and increasing sales to the Federal government drove the
majority of the increase in revenue in Americas Commercial. This
growth was partially offset by weaker performance with our
global customers and
small-and-medium
business customers. We anticipate continued conservative
spending in the U.S. in the second half of Fiscal 2009.
From a product perspective, the slow net revenue growth was due
to decreases in desktop sales of 1% and 7% for the second
quarter and first six months of Fiscal 2009, respectively, on
desktop unit growth of 3% and 1%, for the second quarter and
first half of Fiscal 2009, respectively. This was offset by
strong revenue growth of services and software and peripherals,
which grew 18% and 14%, respectively, during the second quarter
of Fiscal 2009 and 22% and 14% for the first half of Fiscal
2009. Growth in Latin America was led by Brazil and Chile, which
experienced a 38% and 35% respectively,
year-over-year
increase in revenue during the second quarter of Fiscal 2009 as
compared to Fiscal 2008.
|
Americas Commercial grew revenue as well as units by 6% in
Fiscal 2008, compared to 3% revenue growth on a slight unit
decline in Fiscal 2007. The increase in revenue in Fiscal 2008
resulted from strong sales of mobility products, servers and
networking, services, and software and peripherals, which grew
9%, 8%, 9%, and 13%, respectively,
year-over-year.
The unit volume increases resulted from strong growth in
notebooks. In Fiscal 2007, the slow down of net revenue growth
was due to desktop weakness, lower demand, and a significant
decline in our Public business.
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EMEA Commercial EMEA Commercial
had 11%
year-over-year
net revenue growth on unit shipment growth of 20%. The unit
volume increases were the result of strong growth in mobility,
with units up 52% and continued strength in emerging markets.
The revenue growth was primarily a result of higher demand for
mobility products, represented by a 33% increase in revenue.
Growth in software and peripherals revenue also contributed to
EMEA Commercials strong second quarter Fiscal 2009 revenue
performance, with revenue growth of 21%
year-over-year.
These increases were partially offset by desktop sales with a
revenue decrease of 6%
year-over-year.
EMEA experienced strong revenue growth in emerging countries and
small-and-medium
business. This growth, while consistent with our overall
strategy, drove a mix shift in the EMEA Commercial revenue base
coupled with softness in EMEA Commercials global and large
commercial customers revenue. As a result, during the second
quarter of Fiscal 2009, total average revenue per unit decreased
8%, which reflects our product and customer mix.
|
During the first half of Fiscal 2009 EMEA Commercial had 13%
year-over-year
increase in net revenue with unit shipments up by 25%. This
growth was due to increase in mobility revenue of 33% on unit
growth of 55% during the first half of Fiscal 2009 compared to
the same period last year. EMEA experienced strong revenue
growth for the first six months of Fiscal 2009 consistent with
the second quarter revenue growth in emerging countries as well
as small and medium businesses. The strong Euro and British
Pound against the U.S. dollar during the second quarter of
Fiscal 2009 helped to stimulate overall demand; however, we
generally pass on these foreign currency benefits to customers
through lower local currency pricing of products and services,
as we typically manage our business on a U.S. dollar basis.
39
During Fiscal 2008, EMEA Commercial represented 22% of our total
consolidated net revenue as compared to 21% in Fiscal 2007. EMEA
Commercial had 15%
year-over-year
net revenue growth as a result of unit shipment growth of 12%.
Average price per unit increased 2%, which reflects the mix of
products sold and a benefit from the strengthening of the Euro
and British Pound against the U.S. dollar during Fiscal
2008, offset by our pricing strategy. The revenue growth was
primarily a result of higher demand for mobility products,
represented by a unit shipment increase of 30%. Additionally,
revenue grew
year-over-year
for all product categories within EMEA Commercial, led by growth
in mobility, services, and software & peripherals
revenue of 23%, 32%, and 18%, respectively. In Fiscal 2007,
revenue in EMEA Commercial grew 6%
year-over-year.
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|
|
APJ Commercial During the second
quarter and first six months of Fiscal 2009, APJ Commercial
experienced a 16% and 17%
year-over-year
increase in revenue to $2.1 billion and $4.1 billion,
respectively. For the second quarter and first half of Fiscal
2009, sales of mobility products and unit volume increased
year-over-year
by 24% and 27%, and 30% and 36%, respectively, compared to same
period last year. Sales of mobility products grew due to the
continued shift in customer preference from desktops to
notebooks. APJ Commercial also reported 16% revenue growth in
servers and networking on unit growth of 21% primarily due to
our focus on delivering greater value within customer data
centers with our rack optimized server platforms, whose average
selling prices are higher than our tower servers. From a country
perspective, Malaysia, Australia, and New Zealand experienced
strong revenue growth during the second quarter of Fiscal 2009.
Significant growth in India, and China during the second quarter
of Fiscal 2009 contributed to a revenue growth rate of 31% and
19%, respectively, for these targeted BRIC countries.
|
During Fiscal 2008, APJ Commercials revenue continued to
improve, with 15% revenue growth
year-over-year.
Consistent with the EMEA Commercial segment, these increases
were mainly a result of strong growth in mobility. Unit sales of
mobility products increased 32% in Fiscal 2008 as compared to
Fiscal 2007. Sales of mobility products grew due to a shift in
customer preference from desktops to notebooks as well as the
strong reception of our
Vostrotm
notebooks. APJ Commercial also reported 21% growth in servers
and networking revenue primarily due to our focus on delivering
greater value within customer data centers with our rack
optimized server platforms, whose average selling prices are
higher than our tower servers. These increases were partially
offset by a decrease in services revenue of 13%. In Fiscal 2007,
APJ Commercial reported 12%
year-over-year
revenue growth on unit growth of 19%.
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|
Global Consumer Global Consumer
revenue increased 28% and 24%
year-over-year
for second quarter of Fiscal 2009 and first half of Fiscal 2009,
respectively, on unit growth of 53% and 50% for the second
quarter and first half of Fiscal 2009, respectively. We grew
faster than the industry on a unit basis and increased our
global share. This growth was led by APJ Consumer with 65%
year-over-year
increase in revenue. The increase in Global Consumer revenue is
mainly due to strong mobility sales. Mobility revenue increased
62% and 56% in the second quarter and first six months of Fiscal
2009, respectively, on a unit increase of 101% and 90%,
respectively as compared to the same periods last year. Software
and peripherals revenue grew 24% and 26% during the second
quarter and first half of Fiscal 2009, respectively. Our
mobility growth in this segment can be primarily attributed to
our entrance into retail distribution arrangements, which began
in the second half of Fiscal 2008, and the continued shift of
consumer preference from desktops to notebooks. Our software and
peripherals growth is due to a strong performance in software
licensing. These increases were offset by a 8% and 7% decrease
in desktop revenue although desktop units grew 5% and 11% for
the second quarter and first half of Fiscal 2009, respectively.
|
Global Consumer revenue and unit volume decreased 6% and 12%,
respectively, in Fiscal 2008, compared to revenue and unit
decreases of 5% and 3%, respectively, in Fiscal 2007. Global
Consumer revenue declined as compared to Fiscal 2007 primarily
due to a 23% decline in desktop unit volumes. In Fiscal 2008,
this segments average selling price increased 6%
year-over-year
mainly due to realigning prices and selling a more profitable
product mix. We continue to see a shift to mobility products in
Global Consumer and our other segments as notebooks become more
affordable. In response to this environment, we have updated our
business model for Global Consumer and have entered into a
limited number of retail distribution arrangements to complement
and extend the existing direct business. In the fourth quarter
of Fiscal 2008, the Global Consumer business began to improve
and posted revenue growth of 16% over the fourth quarter of
Fiscal
40
2007, which reflects changes we have made to the business to
reignite growth, including introducing four notebook families
for consumers in six months. In Fiscal 2009, we expect to
continue to expand our product offerings by launching 50% more
new notebooks than in Fiscal 2008.
For additional information regarding our reportable segments,
see Note 11 of each of Notes to Annual Consolidated
Financial Statements and Notes to Quarterly Condensed
Consolidated Financial Statements included elsewhere in this
prospectus.
Revenue
by Product and Services Categories
We design, develop, manufacture, market, sell, and support a
wide range of products that in many cases are customized to
individual customer requirements. Our product categories include
desktop computer systems, mobility products, software and
peripherals, servers and networking products, and storage
products. In addition, we offer a range of services.
The following tables summarize our net revenue by product
categories and services:
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|
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|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except percentages)
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs
|
|
$
|
4,928
|
|
|
|
30%
|
|
|
$
|
5,017
|
|
|
|
34%
|
|
|
$
|
9,628
|
|
|
|
30%
|
|
|
$
|
9,959
|
|
|
|
34%
|
|
Mobility
|
|
|
4,871
|
|
|
|
30%
|
|
|
|
3,865
|
|
|
|
26%
|
|
|
|
9,775
|
|
|
|
30%
|
|
|
|
7,881
|
|
|
|
26%
|
|
Software & peripherals
|
|
|
2,790
|
|
|
|
17%
|
|
|
|
2,380
|
|
|
|
16%
|
|
|
|
5,531
|
|
|
|
17%
|
|
|
|
4,721
|
|
|
|
16%
|
|
Servers & networking
|
|
|
1,702
|
|
|
|
10%
|
|
|
|
1,618
|
|
|
|
11%
|
|
|
|
3,355
|
|
|
|
10%
|
|
|
|
3,211
|
|
|
|
11%
|
|
Services
|
|
|
1,462
|
|
|
|
9%
|
|
|
|
1,283
|
|
|
|
9%
|
|
|
|
2,910
|
|
|
|
9%
|
|
|
|
2,564
|
|
|
|
9%
|
|
Storage
|
|
|
681
|
|
|
|
4%
|
|
|
|
613
|
|
|
|
4%
|
|
|
|
1,312
|
|
|
|
4%
|
|
|
|
1,162
|
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
16,434
|
|
|
|
100%
|
|
|
$
|
14,776
|
|
|
|
100%
|
|
|
$
|
32,511
|
|
|
|
100%
|
|
|
$
|
29,498
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1, 2008
|
|
|
February 2, 2007
|
|
|
February 3, 2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except percentage)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs
|
|
$
|
19,573
|
|
|
|
32%
|
|
|
$
|
19,815
|
|
|
|
34%
|
|
|
$
|
21,568
|
|
|
|
39%
|
|
Mobility
|
|
|
17,423
|
|
|
|
28%
|
|
|
|
15,480
|
|
|
|
27%
|
|
|
|
14,372
|
|
|
|
25%
|
|
Software and peripherals
|
|
|
9,908
|
|
|
|
16%
|
|
|
|
9,001
|
|
|
|
16%
|
|
|
|
8,329
|
|
|
|
15%
|
|
Servers and networking
|
|
|
6,474
|
|
|
|
11%
|
|
|
|
5,805
|
|
|
|
10%
|
|
|
|
5,449
|
|
|
|
10%
|
|
Services
|
|
|
5,320
|
|
|
|
9%
|
|
|
|
5,063
|
|
|
|
9%
|
|
|
|
4,207
|
|
|
|
8%
|
|
Storage
|
|
|
2,435
|
|
|
|
4%
|
|
|
|
2,256
|
|
|
|
4%
|
|
|
|
1,863
|
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
61,133
|
|
|
|
100%
|
|
|
$
|
57,420
|
|
|
|
100%
|
|
|
$
|
55,788
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs During the second quarter
and first six months of Fiscal 2009, revenue from desktop PCs
(which includes desktop computer systems and workstations)
decreased 2% and 3%, respectively, from the same periods of
Fiscal 2008. The decline was primarily due to the on-going
competitive pricing pressure for lower priced desktops. The
demand for desktops continues to decrease as customers
preference shifts to mobility products. Consequently, our
average selling price for desktops decreased 6% and 9%
year-over-year
during the first quarter and first half of Fiscal 2009,
respectively, as we aligned our prices and product offerings
with the marketplace. As a result of our pricing strategy, we
were able to gain share during the second quarter and first half
of calendar 2008. Average industry unit growth was 1% during
those time periods compared to our unit growth of 5% and 7%
during the second quarter and first six months of Fiscal 2009.
Desktop revenue declined across all of our segments except for
APJ Commercial, which experienced
|
41
|
|
|
|
|
year-over-year
revenue growth of 11% for both the second quarter and first six
months of Fiscal 2009. Our Americas Commercial, EMEA Commercial,
and Global Consumer segments experienced weaker performance in
desktop sales with
year-over-year
decreases of 1%, 6%, and 8%, respectively, for the second
quarter of Fiscal 2009, and revenue decreases of 7%, 3%, and 7%,
respectively, for the six months ending August 1, 2008. We
are continuing to see rising user demand for mobility products
that contributes to further slowing demand for desktop PCs as
mobility growth is expected to outpace desktop growth at a rate
of approximately
six-to-one.
|
During Fiscal 2008, revenue from desktop PCs (which includes
desktop computer systems and workstations) decreased slightly
from Fiscal 2007 revenue on a unit decline of 2% even though
worldwide industry unit sales grew 5% during calendar 2007. The
decline was primarily due to us being out of product feature and
price position and consumers migration to mobility
products. Our Global Consumer segment continued to perform below
expectation in Fiscal 2008 with a significant
year-over-year
decrease in desktop revenue of 13%. Global Consumer was the
primary contributor to our worldwide full year decline in
desktop revenue with Americas Commercial also contributing to
the weaker performance during Fiscal 2008 as compared to Fiscal
2007. This decline was partially offset by a strong performance
in APJ Commercial where desktop revenue and units both increased
13% during Fiscal 2008 over prior year. We will likely see
rising user demand for mobility products in the foreseeable
future that will contribute to a slowing demand for desktop PCs
as mobility growth is expected to outpace desktop growth at a
rate of approximately
six-to-one.
In Fiscal 2008, we introduced
Vostrotm
desktops specifically designed to meet the needs of small
business customers.
|
|
|
|
|
Mobility During the second
quarter and first half of Fiscal 2009, revenue from mobility
products grew 26% and 24%, respectively, on unit growth of 44%
for both periods. This unit growth rate outpaced the
industrys
year-over-year
unit growth of 37% and 38% for the second quarter and first six
months of calendar 2008, respectively. We posted strong
double-digit revenue growth across all segments, except for
Americas Commercial, whose mobility revenue increased
year-over-year
only 4% and 1% for the second quarter and first six months of
Fiscal 2009. We continued to see conservative spending in the
small-and-medium
business sector and with our large global customers in our
Americas Commercial business; however, Americas Commercial
experienced strong growth in its Federal government and Latin
America sectors. Additionally, competitive pricing pressures,
which were most pronounced in our Global Consumer and EMEA
Commercial segments, drove our average unit pricing down in
Fiscal 2009. For the second quarter of Fiscal 2009, mobility
revenue in Global Consumer, APJ Commercial, and EMEA Commercial
grew 62%, 24%, and 33%
year-over-year,
respectively, on unit growth of 101%, 27%, and 52%,
respectively. For the six months ending August 1, 2008,
mobility revenue in Global Consumer, APJ Commercial, and EMEA
Commercial grew 56%, 30%, and 33%
year-over-year,
respectively, on unit growth of 90%, 36%, and 55%, respectively.
The
year-over-year
growth in mobility was driven by our expansion into consumer
retail and also increasing our notebook platforms by 50% this
year. We recently announced a completely new line of
Latitudetm
and Dell Precision notebooks, ranging from the lightest
ultra-portable in our history to the most powerful workstation.
We also introduced the industrys first convertible tablet
with multi-touch capabilities on the Dell LatitudeTMXT. As
notebooks become more affordable and wireless products become
standardized, demand for our mobility products continues to be
strong.
|
In Fiscal 2008, revenue from mobility products (which includes
notebook computers and mobile workstations) grew 13%
year-over-year
on unit growth of 16%. The growth was led by the APJ Commercial
and EMEA Commercial segments with 35% and 23% increases in
revenue
year-over-year,
respectively, while Americas Commercial revenue increased 9%.
Unit shipments grew
year-over-year
in these three segments by 32%, 30%, and 19%, respectively.
Global Consumer mobility units were flat during Fiscal 2008 as
compared to Fiscal 2007. Even though we posted double-digit
mobility growth during Fiscal 2008, according to IDC, industry
mobility shipments grew 34% during calendar 2007. To capitalize
on the industry growth in mobility, we have separated our
consumer and commercial design functions focusing
our consumer team on innovation and shorter design cycles. As a
result, we have launched four consumer notebook families in the
past six months, including
Inspirontm
color notebooks and
XPStmnotebooks,
for which the demand has been better than expected. We also
introduced
Vostrotm
notebooks, specifically designed to meet the needs of small
business customers. During the fourth quarter of Fiscal 2008, we
42
launched our first tablet the
Latitudetm
XT, the industrys only
sub-four
pound convertible tablet with pen and touch capability. As
notebooks become more affordable and wireless products become
standardized, demand for our mobility products continues to be
strong, producing robust
year-over-year
revenue and unit growth. We are likely to see sustained growth
in our mobility products in the foreseeable future due to the
continued industry-wide migration from desktop PCs to mobility
products.
In Fiscal 2007, revenue from mobility products grew by 8%
year-over-year
as compared to 20% in the previous year. The impact of the
diminished growth was particularly acute in the U.S. and
led to a loss of share as compared to Fiscal 2006. The slow
growth resulted from both our product feature set and related
value offering, particularly in the consumer business, as well
as our inability to reach certain customer sets.
|
|
|
|
|
Software and Peripherals Revenue from
sales of software and peripherals (S&P)
consists of Dell-branded printers, monitors (not sold with
systems), projectors, and a multitude of competitively priced
third-party peripherals including plasma and LCD televisions,
software, and other products. This revenue grew 17%
year-over-year
for both the second quarter and first six months of Fiscal 2009
driven by strength in software licensing. The growth was driven
by our acquisition of ASAP Software (ASAP) in the
fourth quarter of Fiscal 2008. With ASAP, we now offer products
from over 2,000 software publishers. At a segment level, Global
Consumer led the revenue growth with a 24%
year-over-year
increase for the second quarter of Fiscal 2009 and a 26%
year-over-year
growth rate for the first half of Fiscal 2009. APJ Commercial,
EMEA Commercial, and Americas Commercial also experienced strong
revenue growth of 18%, 21%, and 14%, respectively, for the three
months ending August 1, 2008, and 19%, 19%, and 14%,
respectively, for the six months ending August 1, 2008.
From a dollars perspective, Americas Commercial led S&P
revenue growth with
year-over-year
increases of $200 million and $375 million for the
second quarter and first six months of Fiscal 2009, which
reflects the strong performance of ASAP. Our S&P growth can
also be attributed to improved performance in our displays
business where we regained our number one position worldwide in
flat panel displays.
|
In Fiscal 2008, revenue from S&P increased 10%
year-over-year.
EMEA Commercial lead S&P revenue growth with a
year-over-year
increase of 18%, and Americas Commercial and APJ Commercial
revenue growth was 13% and 12%, respectively, during Fiscal 2008
as compared to Fiscal 2007. The increase in S&P revenue is
primarily attributable to strength in imaging and printing,
digital displays, and software licensing.
In Fiscal 2007, revenue from S&P increased 8%
year-over-year.
This increase was primarily attributable to a 12%
year-over-year
increase in software revenue that was offset by declines in our
imaging product revenue.
|
|
|
|
|
Servers and Networking Revenue from
sales of servers and networking products grew 5%
year-over-year
for both the second quarter and first six months of Fiscal 2009
on unit growth of 19% and 20%, respectively. Our
year-over-year
unit growth outpaced the industrys growth of 13% and 11%
during the second quarter and first six months of calendar 2008,
respectively. Our server and networking revenue grew slower than
units due to our pricing strategy as we shift our product
offerings to lower price bands to drive growth. APJ Commercial,
EMEA Commercial, and Americas Commercial contributed to the
modest revenue growth, and in the second quarter and first half
of calendar 2008, we were again ranked number one in the United
States with a 39% and 37% share, respectively, in server units
shipped. Servers and networking revenue growth benefited from
the success of our cloud computing initiatives featuring
energy-efficient Dell customer solutions. During the quarter, we
released our broadest lineup of dedicated virtualization
solutions ever, including more than a dozen new servers, tools,
and services, as a part of our mission to help companies of all
sizes to simplify their IT environments.
|
In Fiscal 2008, servers and networking revenue grew 12% on unit
growth of 6%
year-over-year
as compared to industry unit growth of 8%. Our unit growth was
slightly behind the growth in the overall industry, while we
improved our product feature sets by transitioning to new
platforms, and as we managed through the realignment of certain
portions of our sales force to address sales execution
deficiencies. A significant portion of the revenue growth is due
to higher average selling prices, which increased 5% during
Fiscal 2008 as compared to the prior year. Fourth quarter
year-over-year
revenue growth of 2% was below industry growth and our
expectations as conservatism in the U.S. commercial sectors
affected sales of our server products. All regions experienced
strong
year-over-year
revenue growth with APJ Commercial leading the
43
way with 21% growth on unit growth of 6%; additionally, server
and networking revenue increased 16% and 8% in EMEA Commercial
and Americas Commercial, respectively. For Fiscal 2008, we were
again ranked number one in the United States with a 34% share in
server units shipped; worldwide we were second with a 25% share.
Servers and networking remains a strategic focus area. Late in
the fourth quarter, we launched our 10G blade
servers the most energy efficient blade server
solution on the market. Our PowerEdge servers are ranked number
one in server benchmark testing for overall performance, energy
efficiency, and price.
In Fiscal 2007, servers and networking revenue grew 7% on unit
growth of 6%
year-over-year.
During Fiscal 2007 we introduced our new ninth generation (9G)
PowerEdge servers with Intels Xeon 5100 series processors,
and we began shipping two new PowerEdge servers featuring AMD
Opterontm
processors, providing our customers with an additional choice
for high-performance two-socket and four-socket systems. We also
launched the industrys first standards-based Quad-Core
processors for two-socket blade, rack, and tower servers.
|
|
|
|
|
Services Services consists of a wide
range of services including assessment, design and
implementation, deployment, asset recovery and recycling,
training, enterprise support, client support, and managed
lifecycle. Services revenue increased 14%
year-over-year
for the three and six-month periods ended August 1, 2008,
to $1.5 billion and $2.9 billion, respectively, aided
by our new ProSupport offerings, which distilled ten service
offerings down to two customizable packages spanning our
commercial product and solutions portfolios with flexible
options for service level and proactive management. Americas
Commercial and APJ Commercial drove the increase in services
revenue with revenue growth of 18% and 17%, respectively, in the
second quarter of Fiscal 2009 as compared to the second quarter
of Fiscal 2008, and revenue growth of 22% and 18%, respectively,
for the first half of Fiscal 2009 as compared to the first half
of Fiscal 2008. EMEA Commercial contributed with
year-over-year
revenue growth of 3% for the second quarter and 6% for the first
six months of Fiscal 2009. EMEA Commercials services
revenue is lower than our other segments mainly due to a higher
level of deferred service revenue related to strategic changes
in our service offerings. The
year-over-year
growth is attributed to the strong performance of our Lifecycle
services in our Americas Commercial and APJ Commercial segments
and amortization of deferred service revenue. During Fiscal
2008, we acquired a number of service technologies and
capabilities through strategic acquisitions of certain
companies. These capabilities are being used to build-out our
mix of service offerings. We are continuing to make solid
progress in services, including ProSupport, remote
infrastructure management, and Software as a Service (SaaS),
which are aimed at simplifying IT for our customers. Our
deferred service revenue balance increased from
$5.3 billion at February 1, 2008, to $5.7 billion
at August 1, 2008, due to continued strength in as sold
services sales.
|
In Fiscal 2008, revenue from services increased 5%
year-over-year
compared to a 20% increase in Fiscal 2007. EMEA Commercial drove
services revenue growth with a 32% increase in Fiscal 2008 as
compared to Fiscal 2007, and Americas Commercial contributed
with 9% revenue growth. This growth was offset by revenue
declines in Global Consumer and APJ Commercial of 25% and 13%,
respectively. Strong Fiscal 2008 services sales increased our
deferred service revenue balance by approximately
$1.0 billion in Fiscal 2008, a 25% increase to
approximately $5.3 billion. In Fiscal 2007, our deferred
service revenue increased $514 million or 14% to
approximately $4.2 billion. During Fiscal 2008, we acquired
a number of service technologies and capabilities through
strategic acquisitions of certain companies. These capabilities
are being used to build-out our mix of service offerings. In the
first quarter of Fiscal 2009, we introduced ProSupport, which
distilled ten service offerings down to two customizable
packages spanning our commercial product and solutions
portfolios with flexible options for service level and proactive
management.
In Fiscal 2007, revenue from services increased 20%
year-over-year.
We introduced our new Platinum Plus offering during Fiscal 2007,
which contributed to an increase in our premium service
contracts.
|
|
|
|
|
Storage Revenue from sales of storage
products increased 11% and 13%
year-over-year
for the second quarter and first six months of Fiscal 2009.
Year-over-year
storage growth was led by strength in our PowerVault line and
the strong performance of our EqualLogic iSCSI networked storage
solutions. To date
|
44
|
|
|
|
|
since acquisition, EqualLogics business performance has
met our expectations. The APJ Commercial, EMEA Commercial, and
Americas Commercial regions all contributed to the strong
year-over-year
revenue growth. APJ Commercial led the revenue growth, with a
31% increase for the second quarter of Fiscal 2009; whereas,
EMEA Commercial led storage revenue growth for the six-month
period ending August 1, 2008, with a growth rate of 31%.
|
In Fiscal 2008, storage revenue increased 8% as compared to a
21% increase in Fiscal 2007. The revenue growth was led by EMEA
Commercial, which experienced strong growth of 18%;
additionally, APJ Commercial and Americas Commercial increased
10% and 5%, respectively. In Fiscal 2008, we expanded both our
PowerVault and Dell | EMC solutions that drove both
additional increases in performance and customer value. During
the fourth quarter of Fiscal 2008, we completed the acquisition
of EqualLogic, Inc., an industry leader in iSCSI SANs. With this
acquisition, we now provide much broader product offerings for
small and medium business consumers. Industry analysts believe
that the iSCSI SAN space is expected to grow over 125% annually
over the next five years.
In Fiscal 2007, storage revenue sustained double-digit growth
with a 21%
year-over-year
increase. In Fiscal 2007, we also announced a five-year
extension to our partnership with EMC. These portfolio
enhancements continue to deliver lower cost solutions for our
customers.
Gross
Margin
The following tables present information regarding our gross
margin during the three and six months ended August 1, 2008
and August 3, 2007 and Fiscal 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except percentages)
|
|
|
Net revenue
|
|
$
|
16,434
|
|
|
|
100.0%
|
|
|
$
|
14,776
|
|
|
|
100.0%
|
|
|
$
|
32,511
|
|
|
|
100.0%
|
|
|
$
|
29,498
|
|
|
|
100.0%
|
|
Gross margin
|
|
$
|
2,827
|
|
|
|
17.2%
|
|
|
$
|
2,951
|
|
|
|
19.9%
|
|
|
$
|
5,792
|
|
|
|
17.8%
|
|
|
$
|
5,789
|
|
|
|
19.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1, 2008
|
|
|
February 2, 2007
|
|
|
February 3, 2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except percentages)
|
|
|
Net revenue
|
|
$
|
61,133
|
|
|
|
100.0%
|
|
|
$
|
57,420
|
|
|
|
100.0%
|
|
|
$
|
55,788
|
|
|
|
100.0%
|
|
Gross margin
|
|
$
|
11,671
|
|
|
|
19.1%
|
|
|
$
|
9,516
|
|
|
|
16.6%
|
|
|
$
|
9,891
|
|
|
|
17.7%
|
|
During the second quarter of Fiscal 2009, our gross margin
decreased in absolute dollars by $124 million to
$2.8 billion from the same period in the prior year with a
corresponding decrease in gross margin percentage to 17.2% from
19.9%. For the first half of Fiscal 2009, our gross margin
remained flat in absolute dollars at $5.8 billion compared
to the same period in the prior year although gross margin
percentage decreased to 17.8% from 19.6% in the first half of
Fiscal 2008. In the second quarter and first half of Fiscal
2009, overlapping industry-wide declines in component costs and
expanding our presence in retail negatively impacted the overall
gross margin percentage. Additionally, the above-mentioned
increase in EMEA Commercial deferred service revenue negatively
impacted gross margins in the quarter. In the first half of
Fiscal 2009, gross margin was positively impacted by a favorable
ruling in a patent litigation case and the related reversal of
$55 million of litigation reserves through cost of sales.
The gross margin percentage for all segments was impacted by
overlapping record industry-wide declines in component costs and
competitive pricing pressures. Our average selling price
decreased and adversely impacted gross margins in the EMEA
Commercial and Global Consumer segments. Gross margins in EMEA
Commercial were also adversely impacted by weaker western
European markets, significant growth in emerging markets with
products focused on lower price and profitability bands, and the
strategic pricing actions that were taken prior to the
realization of cost savings. The APJ Commercial segment gross
margin percentage is down from the second quarter
45
of Fiscal 2008 in part due to growth in emerging markets.
However, gross margin percentage for APJ Commercial is up
overall for the first half of Fiscal 2009 due to higher mobility
shipment volumes. The Global Consumer segment experienced much
higher
year-over-year
shipment volumes in both the second quarter and first half of
Fiscal 2009. The gross margin percentage of the Global Consumer
segment was lower as a result of mix into retail and associated
lack of opportunities to sell customers additional margin rich
adjacencies for both the second quarter and first half of Fiscal
2009, and it was impacted by increasing unit growth in the
price-competitive Asian and Latin American markets. Global
Consumers gross margin in the second quarter was also
negatively impacted by an $18 million increase in
litigation reserves related to an unfavorable court ruling in an
ongoing legal case.
During Fiscal 2008, our gross margin increased in absolute
dollars and as a percentage of revenue from Fiscal 2007, driven
by greater cost declines. The cost environment was more
favorable in the first half of Fiscal 2008 than the second half.
Our gross margin percentage was 18.8% in the fourth quarter of
Fiscal 2008 as compared to 19.3% in the first quarter of Fiscal
2008. The fourth quarter was positively impacted by a
$58 million reduction in accrued liabilities for a one-time
adjustment related to a favorable ruling by the German Federal
Supreme Court on a copyright levy case. We continue to evolve
our inventory and manufacturing business model to capitalize on
component cost declines, and we continuously negotiate with our
suppliers in a variety of areas including availability of
supply, quality, and cost.
We continue to evaluate and optimize our global manufacturing
and distribution network, including our relationships with
original design manufacturers, to better meet customer needs and
reduce product cycle times. Our goal is to introduce the latest
relevant technology more quickly and to rapidly pass on
component cost savings to a broader set of our customers
worldwide. As we continue to evolve our inventory and
manufacturing business model to capitalize on component cost
declines, we continuously negotiate with our suppliers in a
variety of areas including availability of supply, quality, and
cost. These real-time continuous supplier negotiations support
our business model, which is able to respond quickly to changing
market conditions due to our direct customer model and real-time
manufacturing. Because of the fluid nature of these ongoing
negotiations, the timing and amount of supplier discounts and
rebates vary from time to time. These discounts and rebates are
allocated to the segments based on a variety of factors
including strategic initiatives to drive certain programs,
direction from the respective vendors, product mix, and
direction on joint activities.
In general, gross margin and margins on individual products will
remain under downward pressure due to a variety of factors,
including continued industry wide global pricing pressures,
increased competition, compressed product life cycles, potential
increases in the cost and availability of raw materials, and
outside manufacturing services. We will continue to adjust our
pricing strategy with the goals of remaining in competitive
price position while maximizing margin expansion where
appropriate.
We are actively reviewing all aspects of our logistics, supply
chain, and manufacturing footprints. This review is focused on
identifying efficiencies and cost reduction opportunities while
maintaining a strong customer experience. Two examples of this
include: our announcement on March 31, 2008, that we will
close our desktop manufacturing facility in Austin, Texas, and
the sale of our small package fulfillment center in the second
quarter of Fiscal 2009. The cost of these actions and other
headcount and infrastructure reductions was $25 million and
$131 million in the second quarter and first half of Fiscal
2009, respectively, of which approximately $7 million and
$31 million, respectively, affected gross margin. In
addition, we anticipate taking further actions to reduce total
costs in design, materials, and operating expenses.
In Fiscal 2007, our gross margin declined as compared to Fiscal
2006, while revenue increased
year-over-year.
Throughout Fiscal 2007, industry-wide competition put pressure
on average selling prices while our pricing and product strategy
evolved. In Fiscal 2007, we added a second source of micro
processors (chip sets) ending a long-standing
practice of sourcing from only one manufacturer. We believe that
moving to more than one supplier of chip sets is beneficial for
customers long-term, as it adds choice and ensures access to the
most current technologies. During the transition from sole to
dual sourcing of chip sets, gross margin was negatively impacted
as we re-balanced our product and category mix. In addition,
commodity price declines stalled during Fiscal 2007.
46
Operating
Expenses
The following tables present information regarding our operating
expenses for the three and six months ended August 1, 2008
and August 3, 2007 and for Fiscal 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
August 1, 2008
|
|
|
August 3, 2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except
percentages)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
1,840
|
|
|
|
11.2%
|
|
|
$
|
1,894
|
|
|
|
12.8%
|
|
|
$
|
3,752
|
|
|
|
11.5%
|
|
|
$
|
3,657
|
|
|
|
12.4%
|
|
Research, development and engineering
|
|
|
168
|
|
|
|
1.0%
|
|
|
|
155
|
|
|
|
1.0%
|
|
|
|
320
|
|
|
|
1.0%
|
|
|
|
297
|
|
|
|
1.0%
|
|
IPR&D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
2,008
|
|
|
|
12.2%
|
|
|
$
|
2,049
|
|
|
|
13.8%
|
|
|
$
|
4,074
|
|
|
|
12.5%
|
|
|
$
|
3,954
|
|
|
|
13.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1, 2008
|
|
|
February 2, 2007
|
|
|
February 3, 2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except
percentages)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
7,538
|
|
|
|
12.4%
|
|
|
$
|
5,948
|
|
|
|
10.3%
|
|
|
$
|
5,051
|
|
|
|
9.0%
|
|
Research, development, and engineering
|
|
|
610
|
|
|
|
1.0%
|
|
|
|
498
|
|
|
|
0.9%
|
|
|
|
458
|
|
|
|
0.8%
|
|
In-process research and development
|
|
|
83
|
|
|
|
0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
8,231
|
|
|
|
13.5%
|
|
|
$
|
6,446
|
|
|
|
11.2%
|
|
|
$
|
5,509
|
|
|
|
9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative
During the second quarter of Fiscal 2009,
selling, general, and administrative (SG&A)
expenses decreased 3% to $1.8 billion compared to
$1.9 billion in the same period of Fiscal 2008. The
decrease in SG&A expenses from the second quarter of Fiscal
2008 to the second quarter of Fiscal 2009 is primarily due to a
reduction in compensation and outside consulting expenses of
approximately $50 million. This $50 million decrease
is due to decreases in stock-based compensation expense, which
in the second quarter of Fiscal 2008 also included
$86 million of additional expense for cash payments for
expiring stock options. Additionally, costs associated with the
U.S. Securities and Exchange Commission (SEC)
investigation and the Audit Committees independent
investigation decreased by $49 million from the prior year.
Partially offsetting these decreases was an increase in
depreciation, maintenance, and amortization of intangibles
expenses of approximately $45 million
year-over-year.
|
For the first six months of Fiscal 2009, SG&A expenses
increased 3% to $3.8 billion compared to $3.7 billion
for the same period in Fiscal 2008. The increase in SG&A
expenses is primarily due to $100 million of expenses (an
$87 million increase over the prior year) related to
headcount and infrastructure reductions. Additionally,
compensation and outside consulting expenses increased
approximately $25 million for the first half of Fiscal 2009
over the prior year. Compensation costs are affected by both the
weakening U.S. dollar as well as the increase in revenue
year-over-year.
Also, depreciation,
47
maintenance, and amortization of intangibles expenses increased
approximately $85 million over the prior year. Partially
offsetting these increases were the reversal of the excess
amount of the Fiscal 2008 bonus accrual for $38 million in
the first half of Fiscal 2009, and $77 million of
reductions in costs associated with the SEC and Audit Committee
investigations.
During Fiscal 2008, selling, general, and administrative
expenses increased 27% to $7.5 billion. The increase was
primarily due to investigation costs, higher compensation and
benefits expense, and increased outside consulting fees.
Expenses related to the SEC and Audit Committee investigations
were $160 million and $100 million for Fiscal 2008 and
Fiscal 2007, respectively. Fiscal 2008 results also include
$76 million (of the total of $107 million) of
additional expense for cash payments for expiring stock options,
and selling, general, and administrative expenses related to
headcount and infrastructure reductions were $92 million.
In addition, compensation related expenses, which includes the
aforementioned expiring stock options expense and headcount
reductions, increased in Fiscal 2008 compared to Fiscal 2007.
Employee bonus expense also increased substantially in Fiscal
2008 compared to Fiscal 2007 when bonuses were paid at a reduced
amount.
During Fiscal 2007, selling, general, and administrative
expenses increased 18% to $5.9 billion, compared to
$5.1 billion for Fiscal 2006. The increase in Fiscal 2007
as compared to Fiscal 2006 was primarily attributed to increased
compensation costs and outside consulting services. The
compensation increase was largely due to increased stock-based
compensation expense due to the adoption of SFAS 123(R)
($272 million), and the higher outside consulting services
costs were mainly due to the SEC and Audit Committee
investigations ($100 million). In addition, during Fiscal
2007, we made incremental customer experience investments of
$150 million to improve customer satisfaction, repurchase
preferences, as well as technical support. As a result, we
increased our headcount through direct hiring and replacing of
temporary staff with regular employees.
|
|
|
|
|
Research, Development, and Engineering
During the second quarter and first six months
of Fiscal 2009, research, development, and engineering
(RD&E) expenses remained flat as a percentage
of revenue. During the second quarter of Fiscal 2009, RD&E
expenses increased approximately $13 million to
$168 million, and for the six months ending August 1,
2008, RD&E expenses increased approximately
$23 million to $320 million.
|
Research, development, and engineering expenses increased 22% to
$610 million compared to $498 million in Fiscal 2007.
The increase in research, development, and engineering was
primarily driven by significantly higher compensation costs. The
higher compensation costs are partially attributed to increased
focused investments in research and development
(R&D), which are critical to our future growth
and competitive position in the marketplace. During Fiscal 2008,
we implemented our Simplify IT initiative for our
customers. R&D is the foundation for this initiative, which
is aimed at allowing customers to deploy IT faster, run IT at a
lower total cost, and grow IT smarter. In Fiscal 2007, research,
development, and engineering expense increased in absolute
dollars compared to Fiscal 2006 due to increased staffing
levels, product development costs, and stock-based compensation
expense resulting from the adoption of SFAS 123(R).
We manage our research, development, and engineering spending by
targeting those innovations and products most valuable to our
customers, and by relying upon the capabilities of our strategic
partners. We will continue to invest in research, development,
and engineering activities to support our growth and to provide
for new, competitive products. We have obtained 2,109 patents
worldwide and have applied for 2,429 additional patents
worldwide as of August 1, 2008.
|
|
|
|
|
In-Process Research and Development We
recognized in-process research and development
(IPR&D) charges in connection with acquisitions
accounted for as business combinations. For more discussion
regarding our IPR&D accounting, see Note 7 of Notes to
Annual Consolidated Financial Statements and Note 8 of
Notes to Quarterly Condensed Consolidated Financial Statements
included elsewhere in this prospectus. During the first half of
Fiscal 2009, we recorded IPR&D charges of $2 million,
primarily related to our acquisition of Message One, Inc. During
Fiscal 2008, we recorded IPR&D charges of $83 million.
Prior to Fiscal 2008, there were no IPR&D charges related
to acquisitions.
|
48
On May 31, 2007, we announced that we had initiated a
comprehensive review of costs across all processes and
organizations with the goal to simplify structure, eliminate
redundancies, and better align operating expenses with the
current business environment and strategic growth opportunities.
These efforts are continuing. Since this announcement and
through the end of the second quarter of Fiscal 2009, we have
reduced headcount by approximately 8,500, excluding
acquisitions, and strategically closed some of our facilities.
As noted above, we expect to take further action to invest in
strategic growth areas while focusing on scaling costs and
improving productivity.
Stock-Based
Compensation
We use the 2002 Long-Term Incentive Plan, amended in December
2007, for stock-based incentive awards. These awards can be in
the form of stock options, stock appreciation rights, stock
bonuses, restricted stock, restricted stock units, performance
units, or performance shares.
Stock-based compensation expense totaled $436 million for
Fiscal 2008, compared to $368 million and $17 million
for Fiscal 2007 and Fiscal 2006, respectively. The increase in
Fiscal 2008 and Fiscal 2007 as compared to Fiscal 2006 is due to
the implementation of SFAS 123(R) and cash payments of
$107 million made for expired
in-the-money
stock options discussed below. We adopted SFAS 123(R) using
the modified prospective transition method under
SFAS 123(R) effective the first quarter of Fiscal 2007.
Included in stock-based compensation for Fiscal 2008 and Fiscal
2007 is the fair value of stock-based awards earned during the
year, including restricted stock, restricted stock units, and
stock options, as well as the discount associated with stock
purchased under our employee stock purchase plan
(ESPP). The ESPP was discontinued effective February
2008 as part of an overall assessment of our benefits strategy.
Prior to the adoption of SFAS 123(R), we accounted for our
equity incentive plans under the intrinsic value recognition and
measurement principles of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees,
(APB 25) and its related interpretations.
Accordingly, stock-based compensation for the fair value of
employee stock options with no intrinsic value at the grant date
and the discount associated with the stock purchase under our
ESPP was not recognized in net income prior to Fiscal 2007. For
further discussion on stock-based compensation, see Note 5
of Notes to Annual Consolidated Financial Statements included
elsewhere in this prospectus.
At February 1, 2008 there was $93 million and
$600 million of total unrecognized stock-based compensation
expense related to stock options and non-vested restricted
stock, respectively, with the unrecognized stock-based
compensation expense expected to be recognized over a
weighted-average period of 2.0 years and 1.9 years,
respectively. At February 2, 2007 there was
$139 million and $356 million of total unrecognized
stock-based compensation expense related to stock options and
non-vested restricted stock, respectively, with the unrecognized
stock-based compensation expense expected to be recognized over
a weighted-average period of 1.7 years and 2.4 years,
respectively.
Due to our inability to timely file our Annual Report on
Form 10-K
for Fiscal 2007, we suspended the exercise of employee stock
options, the vesting of restricted stock units, and the purchase
of shares under the ESPP on April 4, 2007. As a result, we
agreed to pay cash to current and former employees who held
in-the-money
stock options (options that had an exercise price less than the
then current market price of the stock) that expired during the
period of unexercisability. We made payments of approximately
$107 million in Fiscal 2008 relating to expired
in-the-money
stock options. We are now current in our periodic reporting
obligations and, accordingly, are permitting the exercise of
employee stock options by employees and the vesting of
restricted stock units. As options have again become
exercisable, we do not expect to pay cash for expired
in-the-money
stock options in the future.
49
Investment
and Other Income, net
The table below provides a detailed presentation of investment
and other income, net for the three and six months ended
August 1, 2008 and August 3, 2007 and for Fiscal 2008,
2007, and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August 1,
|
|
August 3,
|
|
August 1,
|
|
August 3,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
(in millions)
|
|
(in millions)
|
|
Investment and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
|
$
|
49
|
|
$
|
123
|
|
$
|
104
|
|
$
|
239
|
Gains (losses) on investments, net
|
|
|
(14)
|
|
|
1
|
|
|
(11)
|
|
|
5
|
Interest expense
|
|
|
(26)
|
|
|
(12)
|
|
|
(38)
|
|
|
(24)
|
CIT minority interest
|
|
|
|
|
|
(9)
|
|
|
|
|
|
(14)
|
Foreign exchange
|
|
|
20
|
|
|
(9)
|
|
|
110
|
|
|
(31)
|
Other
|
|
|
(11)
|
|
|
2
|
|
|
(22)
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income, net
|
|
$
|
18
|
|
$
|
96
|
|
$
|
143
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Investment and other income, net:
|
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
|
$
|
496
|
|
$
|
368
|
|
$
|
308
|
Gains (losses) on investments, net
|
|
|
14
|
|
|
(5)
|
|
|
(2)
|
Interest expense
|
|
|
(45)
|
|
|
(45)
|
|
|
(29)
|
CIT minority interest
|
|
|
(29)
|
|
|
(23)
|
|
|
(27)
|
Foreign exchange
|
|
|
(30)
|
|
|
(37)
|
|
|
3
|
Gain on sale of building
|
|
|
|
|
|
36
|
|
|
|
Other
|
|
|
(19)
|
|
|
(19)
|
|
|
(27)
|
|
|
|
|
|
|
|
|
|
|
Investment and other income, net
|
|
$
|
387
|
|
$
|
275
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
The
year-over-year
decrease in investment income for both the three and six-month
periods ended August 1, 2008, and August 3, 2007, is
primarily due to decreased earnings on lower average investment
balances. Gain (losses) on investments decreased for the second
quarter and first six months of Fiscal 2009 as compared to the
same periods in Fiscal 2008, primarily due to a $10 million
loss recorded for
other-than-temporarily
impaired investments during the second quarter of Fiscal 2009
based on a review of factors consistent with those disclosed in
Note 2 of Notes to Annual Consolidated Financial Statements
included elsewhere in this prospectus. We continue to monitor
our investment portfolio and take a number of actions to
mitigate impacts from the current volatility in the capital
markets. The
year-over-year
increase in interest expense is attributable to interest expense
on the $1.5 billion debt issued in the first quarter of
Fiscal 2009. CIT minority interest was eliminated due to our
purchase of CIT Group Inc.s (CIT) 30% interest
in Dell Financial Services L.P. (DFS) during the
fourth quarter of Fiscal 2008. Foreign exchange increased
year-over-year
for the second quarter of Fiscal 2009 due to gains realized on
our hedge program. In addition to the gains realized on our
hedge program, the
year-over-year
increase in foreign exchange for the six months ended
August 1, 2008, as compared to the prior year, is due to a
$42 million correction of errors in the remeasurement of
certain local currency balances to the functional currency in
prior periods. A deferred revenue liability was incorrectly
remeasured over time based on changes in currency exchange rates
instead of remaining at historical exchange rates while a tax
liability was incorrectly held at a historical rate instead of
being remeasured over time based on changes in currency exchange
rates.
The increase in investment income from Fiscal 2007 to Fiscal
2008 is primarily due to earnings on higher average balances of
cash equivalents and investments, partially offset by lower
interest rates. In Fiscal 2007, investment income increased from
the prior year primarily due to rising interest rates, partially
offset by a decrease
50
in interest income earned on lower average balances of cash
equivalents and investments. The gains in Fiscal 2008 as
compared to losses in Fiscal 2007 and Fiscal 2006 are mainly the
result of sales of securities. The increase from Fiscal 2006 to
Fiscal 2007 in interest expense is due to an increase in the
effective rate on the debt swap agreements and the start of the
commercial paper program in Fiscal 2007. The increase in foreign
exchange loss in Fiscal 2008 and Fiscal 2007 relative to Fiscal
2006 is mainly due to higher net losses on derivative
instruments. The gain on sale of building relates to the sale of
a building in EMEA.
Income
Taxes
We reported an effective income tax rate of approximately 26.4%
for the second quarter of Fiscal 2009, as compared to 25.3% for
the same quarter in the prior year. For the six-month periods
ended August 1, 2008, and August 3, 2007, our
effective tax rate was 24.8% and 25.3%, respectively. Our
effective tax rate was 23.0%, 22.8%, and 21.8% for Fiscal 2008,
2007, and 2006, respectively. The differences between our
effective tax rate and the U.S. federal statutory rate of
35% principally result from our geographical distribution of
taxable income and permanent differences between the book and
tax treatment of certain items. The increase in our effective
rate in the second quarter of Fiscal 2009 is primarily due to
increased profitability mix in higher tax rate jurisdictions
partially offset by decreases in uncertain tax positions in
foreign jurisdictions. Currently, we expect our full year Fiscal
2009 rate to trend slightly higher than our rate for the first
half of Fiscal 2009; however, the tax rate for future fiscal
quarters of Fiscal 2009 will be impacted by several factors,
including the mix of jurisdictions in which income is generated.
We reported an effective tax rate of approximately 23.0% for
Fiscal 2008, as compared to 22.8% for Fiscal 2007. In the fourth
quarter of Fiscal 2008, we were able to access $5.3 billion
in cash from a subsidiary outside of the U.S. to fund share
repurchases, acquisitions, and the continued growth of DFS.
Accessing the cash slightly increased our effective tax rate.
The taxes related to accessing the foreign cash and
nondeductibility of the in-process research and development
acquisition charges were offset primarily by the increase of our
consolidated profitability in lower tax rate jurisdictions
during Fiscal 2008. For Fiscal 2007, we reported an effective
tax rate of approximately 22.8%, as compared to 21.8% for Fiscal
2006. The increase in our Fiscal 2007 effective tax rate
compared to Fiscal 2006 is due to the $85 million tax
reduction in the second quarter of Fiscal 2006 discussed below,
offset by a higher proportion of our operating profits being
generated in lower foreign tax jurisdictions during Fiscal 2007.
Our foreign earnings are generally taxed at lower rates than in
the United States. As a result, sales growth and related profit
earned outside of the U.S. in lower tax jurisdictions is
expected to lower our operational effective tax rate in future
periods.
Dell is currently under income tax audit in various
jurisdictions, including the United States. The tax periods open
to examination by the major taxing jurisdictions to which Dell
is subject include fiscal years 1997 through 2008. Dell does not
anticipate a significant change to the total amount of
unrecognized income tax benefits within the next twelve months.
We adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48) effective
February 3, 2007. FIN 48 clarifies the accounting and
reporting for uncertainties in income taxes recognized in our
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS 109).
FIN 48 prescribes a comprehensive model for the financial
statement recognition, measurement, presentation, and disclosure
of uncertain tax positions taken or expected to be taken in
income tax returns. The adoption of FIN 48 resulted in a
decrease to stockholders equity of approximately
$62 million in the first quarter of Fiscal 2008. For a
further discussion of the impact of FIN 48, see Note 3
of Notes to Annual Consolidated Financial Statements included
elsewhere in this prospectus.
On October 22, 2004, the American Jobs Creation Act of 2004
was signed into law. Among other items, that act created a
temporary incentive for U.S. multinationals to repatriate
accumulated income earned outside the U.S. at an effective
tax rate of 5.25%, versus the U.S. federal statutory rate
of 35%. In the fourth quarter of Fiscal 2005, we recorded an
initial estimated income tax charge of $280 million based
on the decision to repatriate $4.1 billion of foreign
earnings. This tax charge included an amount relating to a
drafting oversight that Congressional leaders expected to
correct in calendar year 2005. On May 10, 2005, the
Department of Treasury issued further guidance that addressed
the drafting oversight. In the second quarter of Fiscal 2006, we
reduced our
51
original estimate of the tax charge by $85 million as a
result of the guidance issued by the Treasury Department. At
February 3, 2006, we had completed the repatriation of the
$4.1 billion in foreign earnings.
Financing
Receivables
Financing Receivables At August 1, 2008,
our financing receivables balance was $2.0 billion, of
which $1.4 billion represents customer receivables. Customer
receivables decreased 15% from our balance at February 1,
2008. This decrease in customer receivables resulted from a
reduction in receivables due from CIT in connection with
promotional programs and an increase in receivables sold to the
conduits. As of August 1, 2008, and February 1, 2008,
the receivable due from CIT in connection with specified
promotional programs was $60 million and $444 million,
respectively. This decrease in the CIT receivables is primarily
due to the liquidation of CIT receivables and funding lower
volumes of promotional receivables through CIT.
At February 1, 2008, our financing receivables balance was
$2.1 billion of which $1.6 billion represented
customer receivables. Customer receivables increased 16% from
our balance at February 2, 2007. This increase primarily
reflects our contractual right to fund a greater percentage of
customer receivables as CITs funding rights decrease.
As our funding rights increase, we expect continued growth in
customer financing receivables. To manage this growth, we will
continue to balance the use of our own working capital and other
sources of liquidity. The key decision factors in the analysis
are the cost of funds, required credit enhancements for
receivables sold to the conduits, and the ability to access the
capital markets. Given the recent volatility in the credit
markets, we are closely monitoring all of our customer
receivables and are actively pursuing alternative strategies to
mitigate any potential balance sheet risk. Based on our
assessment of these customer receivables and the associated
risks, we believe that we are adequately reserved. See
Note 6 of Notes to Annual Consolidated Financial Statements
and Note 5 of Notes to Quarterly Condensed Consolidated
Financial Statements included elsewhere in this prospectus for
additional information.
We closely monitor our portfolio performance and have invested
in credit risk management resources, which allow us to
constantly monitor and evaluate credit risk. During Fiscal 2008
and the first six months of Fiscal 2009, we took underwriting
actions, including reducing our credit approval rate of subprime
customers, in order to protect our portfolio from the
deteriorating credit environment. We continue to assess our
portfolio risk and take additional underwriting actions as we
deem necessary. Subprime consumer receivables comprise
approximately 20% of the gross customer financing receivables
balance at August 1, 2008. Subprime consumer receivables
comprised less than 20% of the net customer financing
receivables balance at February 1, 2008.
In the second quarter of Fiscal 2009, we continued to experience
year-over-year
increased financing receivable credit losses, consistent with
trends in the financial services industry. We maintain an
allowance for losses to cover probable financing receivable
credit losses. The allowance for losses is determined based on
various factors, including historical experience, past due
receivables, receivable type, and customer risk profile.
Substantial changes in the economic environment or any of the
factors mentioned above could change the expectation of
anticipated credit losses. Based on our assessment of the
customer financing receivables and the associated risks, we
believe that we are adequately reserved. As of August 1,
2008, February 1, 2008 and February 2, 2007, the
allowance for financing receivable losses was $102 million,
$96 million and $39 million, respectively. A 10%
change in this allowance would not be material to our
consolidated results. See Note 6 of Notes to Annual
Consolidated Financial Statements and Note 5 of Notes to
Quarterly Condensed Consolidated Financial Statements included
elsewhere in this prospectus for additional information.
On March 31, 2008, we announced that we were undertaking a
strategic assessment of ownership alternatives for DFS financing
activities, focusing primarily on the consumer and
small-and-medium
business revolving credit financing receivables and operations
in the U.S. In September 2008 we completed our assessment and
concluded that we will retain the current ownership and
operating structure of DFS for the forseeable future.
52
Off-Balance
Sheet Arrangements
Asset Securitization During Fiscal 2008 and
the first half of Fiscal 2009, we continued to sell customer
financing receivables to unconsolidated qualifying special
purpose entities. The qualifying special purpose entities are
bankruptcy remote legal entities with assets and liabilities
separate from ours. The sole purpose of the qualifying special
purpose entities is to facilitate the funding of customer
receivables in the capital markets. Once sold, these receivables
are off-balance sheet. We determined the amount of receivables
to securitize based on our funding requirements in conjunction
with specific selection criteria designed for the transaction.
Off-balance sheet securitizations involve the transfer of
customer financing receivables to unconsolidated qualifying
special purpose entities that are accounted for as a sale in
accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities, (SFAS 140). Upon the sale
of the customer receivables, we recognize a gain on the sale and
retain an interest in the assets sold. The gain on sale ranges
from 1% to 3% of the customer receivables sold. The
unconsolidated qualifying special purpose entities have entered
into financing arrangements with various multi-seller conduits
that, in turn, issue asset-backed debt securities in the capital
markets. During the six-month periods ended August 1, 2008,
and August 3, 2007, we sold $796 million and
$557 million, respectively, of customer receivables to
unconsolidated qualifying special purpose entities. The
principal balance of the securitized receivables at
August 1, 2008, and February 1, 2008, was
$1.4 billion and $1.2 billion, respectively. During
Fiscal 2008 and Fiscal 2007, we sold $1.2 billion and
$1.1 billion, respectively, of customer receivables to
unconsolidated qualifying special purpose entities. The
principal balance of the securitized receivables at the end of
Fiscal 2008 and Fiscal 2007 was $1.2 billion and
$1.0 billion, respectively.
We provide credit enhancement to the securitization in the form
of over-collateralization. Receivables transferred to the
qualified special purpose entities exceed the level of debt
issued. We retain the right to receive collections for assets
securitized exceeding the amount required to pay interest,
principal, and other fees and expenses (referred to as retained
interest). Our retained interest in the securitizations is
determined by calculating the present value of these excess cash
flows over the expected duration of the transactions. Our risk
of loss related to securitized receivables is limited to the
amount of our retained interest. We service securitized
contracts and earn a servicing fee. Our securitization
transactions generally do not result in servicing assets and
liabilities, as the contractual fees are adequate compensation
based on fair market value.
In estimating the value of the retained interest, we make a
variety of financial assumptions, including pool credit losses,
payment rates, and discount rates. These assumptions are
supported by both our historical experience and anticipated
trends relative to the particular receivable pool. We review our
investments in retained interests periodically for impairment,
based on their estimated fair value. All gains and losses are
recognized in income immediately. Retained interest balances and
assumptions are disclosed in Note 6 of Notes to Annual
Consolidated Financial Statements and in Note 5 of Notes to
Quarterly Condensed Consolidated Financial Statements elsewhere
in this prospectus.
Our securitization programs contain standard structural features
related to the performance of the securitized receivables. These
structural features include defined credit losses,
delinquencies, average credit scores, and excess collections
above or below specified levels. In the event one or more of
these features are met and we are unable to restructure the
program, no further funding of receivables will be permitted and
the timing of expected retained interest cash flows will be
delayed which would impact the valuation of our retained
interest. Should these events occur, we do not expect a material
adverse effect on the valuation of the retained interest or on
our ability to securitize financing receivables.
Currently, capital markets are experiencing an unusual period of
volatility and reduced liquidity that we expect will continue to
increase costs and credit enhancements required for funding of
financial assets. Our exposure to the capital markets will
increase as we continue to fund additional customer receivables.
We do not expect current capital market conditions to limit our
ability to access liquidity for funding customer receivables in
the future, as we continue to find funding sources in the
capital markets.
53
Liquidity,
Capital Commitments, and Contractual Cash Obligations
Liquidity
Our cash balances are held in numerous locations throughout the
world, including substantial amounts held outside of the U.S.;
however, the majority of our cash and investments that are
located outside of the U.S. are denominated in the
U.S. dollar. Most of the amounts held outside of the
U.S. could be repatriated to the U.S., but, under current
law, would be subject to U.S. federal income taxes, less
applicable foreign tax credits. In some countries repatriation
of certain foreign balances is restricted by local laws. We have
provided for the U.S. federal tax liability on these
amounts for financial statement purposes, except for foreign
earnings that are considered indefinitely reinvested outside of
the U.S. Although we have no intention to do so,
repatriation could result in additional U.S. federal income
tax payments in future years. We utilize a variety of tax
planning and financing strategies with the objective of having
our worldwide cash available in the locations in which it is
needed. In the fourth quarter of Fiscal 2008, we were able to
access $5.3 billion in cash from a subsidiary outside of
the U.S. The cash was used to fund shares repurchases,
acquisitions, and the growth of DFS.
We use cash generated by operations as our primary source of
liquidity and believe that internally generated cash flows are
sufficient to support business operations driven mainly by our
profitability, efficient cash conversion cycle, and the growth
in our deferred service offerings. However, to further
supplement domestic liquidity, promote an efficient capital
structure, and provide us with additional flexibility, we issued
the old notes and increased our commercial paper program and
related revolving credit facility by $500 million to
$1.5 billion in April 2008. We are increasingly relying
upon access to the capital markets to provide sources of
liquidity in the U.S. for general corporate purposes,
including share repurchases. Although we believe that we will be
able to maintain sufficient access to the capital markets,
changes in current market conditions, movement in our credit
ratings, deterioration in our business performance, or adverse
changes in the economy could limit our access to these markets.
We intend to establish the appropriate debt levels based upon
cash flow expectations, overall cost of capital, cash
requirements for operations, and discretionary
spendingincluding items such as share repurchases and
acquisitions. We may access the capital markets during the
remainder Fiscal 2009 dependent on our requirements and market
conditions. We do not believe that the overall credit concerns
in the markets would impede our ability to access the capital
markets in the future because of the overall strength of our
financial position.
We ended the second quarter of Fiscal 2009 with
$9.5 billion in cash, cash equivalents, and investments,
which was flat with respect to February 1, 2008, and down
$4.3 billion from $13.8 billion at the end of the
second quarter of Fiscal 2008. Since February 1, 2008, we
have spent $2.5 billion on share repurchases
offset primarily by our $1.5 billion debt issuance and a
$1.3 billion increase from cash flow from operations. The
decrease in cash and investments from the second quarter of
Fiscal 2008 was a result of spending $6.5 billion on share
repurchases and $2.4 billion on strategic acquisitions
since the third quarter of Fiscal 2008, partially offset by
issuing $1.5 billion in long-term debt and internally
generated cash flows. We continue to evaluate our investments
for any
other-than-temporary
impairments, and during the second quarter of Fiscal 2009, we
recorded a $10 million loss, as noted above, based on a
review of factors consistent with those disclosed in Note 2
of Notes to Annual Consolidated Financial Statements included
elsewhere in this prospectus.
We ended Fiscal 2008 with $9.5 billion in cash and
investments compared to $12.4 billion at the end of Fiscal
2007. The decrease in cash and investments from Fiscal 2007 was
a result of spending $4.0 billion on share repurchases and
a net $2.2 billion on acquisitions, partially offset by
internally generated cash flows. See Market
Risk for discussion related to exposure to changes in the
market value of our investment portfolio. In Fiscal 2008, we
continued to maintain strong liquidity with cash flows from
operations of $3.9 billion, compared to $4.0 billion
54
in Fiscal 2007. The following table summarizes our ending cash,
cash equivalents, and investments balances for the past two
fiscal years:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Cash, cash equivalents, and investments:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,764
|
|
|
$
|
9,546
|
|
Debt securities
|
|
|
1,657
|
|
|
|
2,784
|
|
Equity and other securities
|
|
|
111
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$
|
9,532
|
|
|
$
|
12,445
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the results of our Condensed
Consolidated Statements of Cash Flows for the six-month periods
ended August 1, 2008, and August 3, 2007 and for the
fiscal years ended February 1, 2008, February 2, 2007
and February 3, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Fiscal Year Ended
|
|
|
August 1,
|
|
August 3,
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Cash Flow from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,251
|
|
$
|
1,754
|
|
$
|
3,949
|
|
$
|
3,969
|
|
$
|
4,751
|
Investing activities
|
|
|
579
|
|
|
(121)
|
|
|
(1,763)
|
|
|
1,003
|
|
|
4,149
|
Financing activities
|
|
|
(987)
|
|
|
(16)
|
|
|
(4,120)
|
|
|
(2,551)
|
|
|
(6,252)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
16
|
|
|
41
|
|
|
152
|
|
|
71
|
|
|
(73)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
859
|
|
$
|
1,658
|
|
$
|
(1,782)
|
|
$
|
2,492
|
|
$
|
2,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n
|
Operating Activities Cash provided by
operating activities during the six-month period ended
August 1, 2008, was $1.3 billion compared to
$1.8 billion during the first six months of Fiscal 2008.
The decrease in operating cash flows was primarily led by the
deterioration of our cash conversion cycle, decrease in net
income, and an increase in other assets due to pending receipt
of international incentive claims and VAT receivables.
|
Cash flows from operating activities during Fiscal 2008, 2007,
and 2006 resulted primarily from net income, which represents
our principal source of cash. In Fiscal 2008, the slight
decrease in operating cash flows was primarily due to changes in
working capital slightly offset by the increase in net income.
In Fiscal 2007, the decrease in operating cash flows was
primarily led by a decrease in net income, slightly offset by
changes in working capital. See discussion of our cash
conversion cycle in Key Performance Metrics
below.
Upon adopting SFAS 123(R) in the first quarter of Fiscal
2007, the excess tax benefits associated with employee stock
compensation are classified as a financing activity; however,
the offset reduces cash flows from operations. In Fiscal 2008
and 2007, the excess tax benefit was $12 million and
$80 million, respectively. Prior to adopting
SFAS 123(R), operating cash flows were impacted by income
tax benefits that resulted from the exercise of employee stock
options. These tax benefits totaled $224 million in Fiscal
2006. These benefits are the tax effects of corporate income tax
deductions (that are considered taxable income to the employee)
that represent the amount by which the fair value of our stock
exceeds the option strike price on the day the employee
exercises a stock option. The decline in tax benefits in Fiscal
2008 and Fiscal 2007 from Fiscal 2006 is due to fewer stock
option exercises.
Key Performance Metrics Although our cash
conversion cycle deteriorated from August 3, 2007, our
direct model allows us to maintain an efficient cash conversion
cycle, which compares favorably with that
55
of others in our industry. We are capable of minimizing
inventory risk while collecting amounts due from customers
before paying vendors, thus allowing us to generate annual cash
flows from operating activities that typically exceed net
income. The following table presents the components of our cash
conversion cycle at August 1, 2008 and August 3, 2007
and for the fourth quarter of each of the past three fiscal
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1,
|
|
|
August 3,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Days of sales
outstanding(a)
|
|
|
38
|
|
|
|
35
|
|
|
|
36
|
|
|
|
31
|
|
|
|
29
|
|
Days of supply in
inventory(b)
|
|
|
7
|
|
|
|
7
|
|
|
|
8
|
|
|
|
5
|
|
|
|
5
|
|
Days in accounts
payable(c)
|
|
|
(74)
|
|
|
|
(80)
|
|
|
|
(80)
|
|
|
|
(78)
|
|
|
|
(77)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(29)
|
|
|
|
(38)
|
|
|
|
(36)
|
|
|
|
(42)
|
|
|
|
(43)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Days of sales outstanding (DSO) calculates the
average collection period of our receivables. DSO is based on
the ending net trade receivables and the most recent quarterly
revenue for each period. DSO also includes the effect of product
costs related to customer shipments not yet recognized as
revenue that are classified in other current assets. DSO is
calculated by adding accounts receivable, net of allowance for
doubtful accounts, and customer shipments in transit and
dividing that sum by average net revenue per day for the current
quarter (90 days). At August 1, 2008, and
August 3, 2007, DSO and days of customer shipments not yet
recognized were 35 and 3 days, and 32 and 3 days,
respectively. At February 1, 2008, February 2, 2007,
and February 3, 2006, DSO and days of customer shipments
not yet recognized were 33 and 3 days, 28 and 3 days,
and 26 and 3 days, respectively.
|
|
(b)
|
Days of supply in inventory (DSI) measures the
average number of days from procurement to sale of our product.
DSI is based on ending inventory and most recent quarterly cost
of sales for each period. DSI is calculated by dividing
inventory by average cost of goods sold per day for the current
quarter (90 days).
|
|
(c)
|
Days in accounts payable (DPO) calculates the
average number of days our payables remain outstanding before
payment. DPO is based on ending accounts payable and most recent
quarterly cost of sales for each period. DPO is calculated by
dividing accounts payable by average cost of goods sold per day
for the current quarter (90 days).
|
Our cash conversion cycle contracted by nine days at
August 1, 2008, from August 3, 2007, driven by a three
day increase in DSO and six day decrease in DPO. The increase in
DSO from August 3, 2007, was attributable to our move into
the retail channel and a shift to more customers with longer
payment terms. The decrease in DPO from August 3, 2007, is
attributable to a decrease in non-production supplier payables
as we continue to control our operating expense spending and the
timing of purchases from and payments to suppliers during the
second quarter of Fiscal 2009 as compared to the second quarter
of Fiscal 2008.
Our cash conversion cycle worsened by six days at
February 1, 2008, as compared to February 2, 2007.
This deterioration was driven by a five day increase in DSO
largely attributed to timing of payments from customers, a
continued shift in sales mix from domestic to international, and
an increased presence in the retail channel. In addition, DSI
increased by three days, which was primarily due to strategic
materials purchases. The DSO and DSI declines were offset by a
two-day
increase in DPO largely attributed to an increase in the amount
of strategic material purchases in inventory at the end of
Fiscal 2008 and the number of suppliers with extended payment
terms as compared to Fiscal 2007.
Our cash conversion cycle deteriorated one day at
February 2, 2007, from February 3, 2006. This decline
was driven by a
two-day
increase in DSO largely attributed to higher percentage of our
revenue coming from outside the U.S., where payment terms are
customarily longer and a higher percentage of revenue occurring
at the end of the period. This decline was offset by a
one-day
increase in DPO largely attributed to an increase in the number
of suppliers with extended payment terms as compared to Fiscal
2006.
We defer the cost of revenue associated with customer shipments
not yet recognized as revenue until they are delivered. These
deferred costs are included in our reported DSO because we
believe it presents a more accurate presentation of our DSO and
cash conversion cycle. These deferred costs are recorded in
other current assets in our Condensed Consolidated Statements of
Financial Position and Consolidated Statements of Financial
Position and totaled $521 million and $426 million at
August 1, 2008, and August 3, 2007, respectively, and
$519 million, $424 million, and $417 million at
February 1, 2008, February 2, 2007, and
February 3, 2006, respectively.
We believe that we will continue to experience a cash conversion
cycle in the high negative 20 to the low negative 30 day
range given the shift in our business model with retail
expansion, growth in emerging
56
countries which typically have longer payment terms, and our
changing manufacturing and supplier infrastructure.
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n
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Investing Activities Cash sourced from
investing activities for the six-month period ended
August 1, 2008, was $579 million, compared to cash
used in investing activities of $121 million for the same
period last year. Cash used in investing activities during
Fiscal 2008 was $1.8 billion, as compared to
$1.0 billion cash provided by investing activities during
Fiscal 2007 and $4.1 billion provided in Fiscal 2006. Cash
generated or used in investing activities principally consists
of net maturities and sales or purchases of investments; net
capital expenditures for property, plant, and equipment; and
cash used to fund strategic acquisitions, which was
approximately $165 million in the first half of Fiscal 2009
and $2.2 billion during Fiscal 2008. Considering continued
capital market and interest rate volatility, we decided to
increase liquidity and change the overall interest rate profile
of the portfolio. As a result, in the first half of Fiscal 2009,
we began repositioning our investment portfolio to shorter
duration securities, thus increasing the volume of our sales and
purchases of securities. In Fiscal 2008 as compared to Fiscal
2007, we re-invested a lower amount of our proceeds from the
maturity or sales of investments to build liquidity for share
repurchases and for cash payments made in connection with
acquisitions. In Fiscal 2007 compared to Fiscal 2006, we had a
lower amount of proceeds from maturities and sales of
investments, and this was partially offset by an increase in
capital expenditures as we continued to focus on investing in
our global infrastructure in order to support our rapid global
growth.
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n
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Financing Activities Cash used for financing
activities during the six-month period ended August 1,
2008, was $987 million, compared to use of $16 million
during the same period last year. The year-over- year increase
in cash used for financing activities is due primarily to
repurchase of our common stock as our share repurchase program
was reinstated during the fourth quarter of Fiscal 2008 after
being suspended for the majority of Fiscal 2008, offset by
proceeds from the issuance of long-term debt of
$1.5 billion. During the first half of Fiscal 2009, we
repurchased approximately 112 million shares at an
aggregate cost of $2.5 billion; no shares were repurchased
related to the program during the first six months of Fiscal
2008. We also paid the principal on the Senior Notes of
$200 million that matured in April 2008 as discussed in
Note 12 of Notes to Quarterly Condensed Consolidated
Financial Statements included elsewhere in this prospectus.
|
Cash used in financing activities during Fiscal 2008 was
$4.1 billion, as compared to $2.6 billion in Fiscal
2007 and $6.3 billion in Fiscal 2006. Financing activities
primarily consist of the repurchase of our common stock,
partially offset by proceeds from the issuance of common stock
under employee stock plans and other items. In Fiscal 2008, the
year-over-year
increase in cash used in financing activities was due primarily
to the repurchase of our common stock as the temporary
suspension of our share repurchase program ended in the fourth
quarter of Fiscal 2008. In Fiscal 2008, we repurchased
approximately 179 million shares at an aggregate cost of
$4.0 billion. In Fiscal 2007, the
year-over-year
decrease in cash used in financing activities was due primarily
to the suspension of our share repurchase program in September
2006. During Fiscal 2007, we repurchased approximately
118 million shares at an aggregate cost of
$3.0 billion compared to 204 million shares at an
aggregate cost of $7.2 billion in Fiscal 2006.
We believe our ability to generate cash flows from operations on
an annual basis will continue to be strong, driven mainly by our
profitability, efficient cash conversion cycle, and the growth
in our deferred service offerings. In order to augment our
liquidity and provide us with additional flexibility, we
implemented a commercial paper program with a supporting credit
facility on June 1, 2006. Under the commercial paper
program, we issue, from
time-to-time,
short-term unsecured notes in an aggregate amount not to exceed
$1.5 billion. We use the proceeds for general corporate
purposes. At August 1, 2008, there was $100 million
outstanding under the commercial paper program and no advances
under the supporting credit facility.
We are increasingly relying upon access to the capital markets
to fund financing for our customers and to provide sources of
liquidity in the U.S. for general corporate purposes,
including share repurchases. We believe that we will be able to
access the capital markets to increase the size of our existing
commercial paper program and to meet our liquidity needs.
Although we believe that we will be able to maintain sufficient
access to the capital markets, even in light of the current
market conditions, changes in our credit ratings, deterioration
in our business performance, or adverse changes in the economy
could limit our access to these markets. We intend to establish
the
57
appropriate debt levels based upon cash flow expectations, cash
requirements for operations, discretionary spending, including
items such as share repurchases and acquisitions, and the
overall cost of capital. We do not believe that the overall
credit concerns in the markets would impede our ability to
access the capital markets because of the overall strength of
our financial position. See Note 2 of Notes to Annual
Consolidated Financial Statements and Note 12 of the
Quarterly Condensed Consolidated Financial Statements included
elsewhere in this prospectus for further discussion of our
commercial paper program.
Capital
Commitments
Redeemable Common Stock In prior years, we
inadvertently failed to register with the SEC the issuance of
some shares under certain employee benefit plans. As a result,
certain purchasers of common stock pursuant to those plans may
have the right to rescind their purchases for an amount equal to
the purchase price paid for the shares, plus interest from the
date of purchase. At August 1, 2008, February 1, 2008
and February 2, 2007, we have classified approximately
4 million shares ($83 million), 4 million shares
($94 million) and 5 million shares
($111 million), respectively, that are subject to potential
rescission rights outside of stockholders equity because
the redemption features are not within our control. We may also
be subject to civil and other penalties by regulatory
authorities as a result of the failure to register. These shares
have always been treated as outstanding for financial reporting
purposes. Dell made a registered rescission offer to eligible
plan participants effective as of August 12, 2008. The
registered rescission offer expired on September 26, 2008.
We do not expect the impact of the rescission offer to have a
material impact on our cash flows or results of operations.
Share Repurchase Program We have a share
repurchase program that authorizes us to purchase shares of
common stock in order to increase shareholder value and manage
dilution resulting from shares issued under our equity
compensation plans. However, we do not currently have a policy
that requires the repurchase of common stock in conjunction with
share-based payment arrangements. On December 3, 2007, our
Board of Directors approved a new authorization for an
additional $10.0 billion for share repurchases.
We typically repurchase shares of common stock through a
systematic program of open market purchases. During the second
quarter of Fiscal 2009, we repurchased approximately
60 million shares at an aggregate cost of
$1.4 billion; no shares were repurchased related to the
program during the second quarter of Fiscal 2008. During Fiscal
2008, we repurchased approximately 179 million shares of
common stock for an aggregate cost of $4.0 billion as
compared to 118 million shares at an aggregate cost of
$3.0 billion in Fiscal 2007 and 204 million shares at
an aggregate cost of $7.2 billion in Fiscal 2006. This
significant decrease in share repurchases during Fiscal 2008 and
Fiscal 2007 as compared to Fiscal 2006 is due to the temporary
suspension of our share repurchase program in September 2006. We
recommenced our share repurchase program in the fourth quarter
of Fiscal 2008.
Capital Expenditures During the three and
six-month periods ended August 1, 2008, we spent
approximately $142 million and $264 million,
respectively, and during Fiscal 2008 and Fiscal 2007, we spent
approximately $831 million and $896 million,
respectively, on property, plant, and equipment primarily on our
global expansion efforts and infrastructure investments in order
to support future growth. Product demand and mix, as well as
ongoing investments in operating and information technology
infrastructure, influence the level and prioritization of our
capital expenditures. Capital expenditures for Fiscal 2009,
related to our continued expansion worldwide, are currently
expected to reach approximately $600 million, which is less
than the $831 million spent during Fiscal 2008. These
expenditures are expected to be funded from our cash flows from
operating activities.
Restricted Cash Pursuant to an agreement
between DFS and CIT, we are required to maintain escrow cash
accounts that are held as recourse reserves for credit losses,
performance fee deposits related to our private label credit
card, and deferred servicing revenue. Restricted cash in the
amount of $266 million, $294 million and
$418 million is included in other current assets at
August 1, 2008, February 1, 2008 and February 2,
2007, respectively.
58
Contractual
Cash Obligations
The following table summarizes our contractual cash obligations
at February 1, 2008.
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Payments Due by Period
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Fiscal
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Fiscal
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Total
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Fiscal 2009
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2010-2011
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2012-2013
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Beyond
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(in millions)
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Contractual cash obligations:
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Debt(a)
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$
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529
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$
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227
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$
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2
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$
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$
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300
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Operating leases
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487
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92
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138
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92
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165
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Advances under credit facilities
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23
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23
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Purchase obligations
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893
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544
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348
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1
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Interest
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451
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33
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45
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43
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330
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Current portion of uncertain tax
positions(b)
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98
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98
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Contractual cash obligations
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$
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2,481
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$
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1,017
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$
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533
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$
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136
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$
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795
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(a)
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Changes in the fair value of the debt where the interest rate is
hedged with interest rate swap agreements are not included in
the contractual cash obligations for debt as the debt is
expected to be settled at par at its scheduled maturity date.
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(b)
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The current portion of uncertain tax positions does not include
approximately $1.5 billion in additional liabilities
associated with uncertain tax positions that are not expected to
be liquidated in Fiscal 2009. We are unable to reliably estimate
the expected payment dates for these additional non-current
liabilities.
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Debt On April 17, 2008, we issued the
old notes in three tranches: $600 million aggregate
principal amount of 4.70% Notes due 2013, $500 million
aggregate principal amount of 5.65% Notes due 2018 and
$400 million aggregate principal amount of 6.50% Notes
due 2038. Interest is payable semi-annually on April 15 and
October 15. We also have outstanding $300 million of
7.10% fixed rate senior debentures due April 15, 2028 (the
Senior Debentures), which pay interest semi-annually
on April 15 and October 15. Upon their maturity on
April 15, 2008, we repaid the $200 million of 6.55%
fixed rate senior notes (the Senior Notes).
Concurrent with the issuance of the Senior Notes and Senior
Debentures, we entered into interest rate swap agreements
converting our interest rate exposure from a fixed rate to a
floating rate basis to better align the associated interest rate
characteristics to our cash and investments portfolio. The
interest rate swap agreements had an aggregate notional amount
of $200 million that matured April 15, 2008, and have
an additional aggregate notional amount of $300 million
maturing April 15, 2028. The floating rate for the Senior
Notes was based on three-month London Interbank Offered Rates
plus 0.41% and the floating rate for the Senior Debentures is
based on three-month London Interbank Offered Rates plus 0.79%.
As a result of the interest rate swap agreements, our effective
interest rates for the Senior Notes and Senior Debentures were
5.9% and 6.2%, respectively, for Fiscal 2008.
Operating Leases We lease property and
equipment, manufacturing facilities, and office space under
non-cancellable leases. Certain of these leases obligate us to
pay taxes, maintenance, and repair costs.
Advances Under Credit Facilities Dell India
Pvt Ltd., our wholly-owned subsidiary, maintains unsecured
short-term credit facilities with Citibank N.A. Bangalore Branch
India (Citibank India) that provide a maximum
capacity of $30 million to fund Dell Indias
working capital and import buyers credit needs. Financing is
available in both Indian Rupees and foreign currencies. The
borrowings are extended on an unsecured basis based on our
guarantee to Citibank U.S. Citibank India can cancel the
facilities in whole or in part without prior notice, at which
time any amounts owed under the facilities will become
immediately due and payable. Interest on the outstanding loans
is charged monthly and is calculated based on Citibank
Indias internal cost of funds plus 0.25%. At
February 1, 2008, outstanding advances from Citibank India
totaled $23 million, which are included in short-term
borrowings on our Consolidated Statement of Financial Position.
Purchase Obligations Purchase obligations are
defined as contractual obligations to purchase goods or services
that are enforceable and legally binding on us. These
obligations specify all significant terms, including fixed or
minimum quantities to be purchased; fixed, minimum, or variable
price provisions; and the approximate timing of the transaction.
Purchase obligations do not include contracts that may be
cancelled without penalty.
59
We utilize several suppliers to manufacture
sub-assemblies
for our products. Our efficient supply chain management allows
us to enter into flexible and mutually beneficial purchase
arrangements with our suppliers in order to minimize inventory
risk. Consistent with industry practice, we acquire raw
materials or other goods and services, including product
components, by issuing to suppliers authorizations to purchase
based on our projected demand and manufacturing needs. These
purchase orders are typically fulfilled within 30 days and
are entered into during the ordinary course of business in order
to establish best pricing and continuity of supply for our
production. Purchase orders are not included in the table above
as they typically represent our authorization to purchase rather
than binding purchase obligations.
Our purchase obligations increased from $893 million at
February 1, 2008, to approximately $2.8 billion at
August 1, 2008. The increase is primarily due to us
entering into longer-term purchase commitments with selected
suppliers for certain commodities in order to ensure supply of
select key components at the most favorable pricing. The
agreements run through the end of Fiscal 2009 and allow for some
variation in the units we are required to purchase. The purchase
commitment approximates $1.9 billion for the remainder of
Fiscal 2009.
Purchase obligations increased to $893 million at
February 1, 2008, from $570 million at
February 2, 2007. The significant increase is mainly due to
the signing of a $450 million marketing services agreement
with a vendor during the fourth quarter of Fiscal 2008,
partially offset by a $99 million decrease in purchase
commitments related to the improvement and construction of
facilities as several projects were finished during Fiscal 2008,
and a net decrease in our other purchase commitments.
Interest See Note 2 of Notes to the
Annual Consolidated Financial Statements and Note 12 of
Notes to Quarterly Condensed Consolidated Financial Statements
included elsewhere in this prospectus for further discussion of
our debt and related interest expense.
Market
Risk
We are exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of
our investments. In the normal course of business, we employ
established policies and procedures to manage these risks.
Foreign
Currency Hedging Activities
Our objective in managing our exposures to foreign currency
exchange rate fluctuations is to reduce the impact of adverse
fluctuations on earnings and cash flows associated with foreign
currency exchange rate changes. Accordingly, we utilize foreign
currency option contracts and forward contracts to hedge our
exposure on forecasted transactions and firm commitments in over
20 currencies in which we transact business. The principal
currencies hedged during Fiscal 2008 were the Euro, British
Pound, Japanese Yen, and Canadian Dollar. We monitor our foreign
currency exchange exposures to ensure the overall effectiveness
of our foreign currency hedge positions. However, there can be
no assurance that our foreign currency hedging activities will
substantially offset the impact of fluctuations in currency
exchange rates on our results of operations and financial
position. During Fiscal 2008, the U.S. dollar weakened
relative to the other principal currencies in which we transact
business. However, as a result of our hedging activities,
foreign currency fluctuations did not have a significant impact
on our results of operations and financial position during
Fiscal 2008, 2007, and 2006.
Based on our foreign currency cash flow hedge instruments
outstanding at February 1, 2008 and February 2, 2007,
we estimate a maximum potential
one-day loss
in fair value of approximately $57 million and
$41 million, respectively, using a
Value-at-Risk
(VAR) model. The VAR model estimates were made
assuming normal market conditions and a 95% confidence level. We
used a Monte Carlo simulation type model that valued our foreign
currency instruments against a thousand randomly generated
market price paths. Forecasted transactions, firm commitments,
fair value hedge instruments, and accounts receivable and
payable denominated in foreign currencies were excluded from the
model. The VAR model is a risk estimation tool, and as such, is
not intended to represent actual losses in fair value that will
be incurred. Additionally, as we utilize foreign currency
instruments for hedging forecasted and firmly committed
transactions, a loss in fair value for those instruments is
generally offset by increases in the value of the underlying
exposure.
60
Cash
and Investments
At February 1, 2008, we had $9.5 billion of total
cash, cash equivalents, and investments. Our investment policy
is to manage our total cash and investments balances to preserve
principal and maintain liquidity while maximizing the return on
the investment portfolio through the full investment of
available funds. We diversify our investment portfolio by
investing in multiple types of investment-grade securities and
through the use of third-party investment managers.
Of the $9.5 billion, $7.8 billion is classified as
cash and cash equivalents. Due to the nature of these
investments, we consider it reasonable to expect that their fair
market values will not be significantly impacted by a change in
interest rates, and that these investments can be liquidated for
cash at short notice. As of February 1, 2008, the carrying
value of our cash equivalents approximated fair value.
The remaining $1.7 billion is primarily invested in fixed
income securities including government, agency, asset-backed,
mortgage-backed and corporate debt securities of varying
maturities at the date of acquisition. The fair value of our
portfolio is affected primarily by interest rates more so than
by the credit and liquidity issues currently facing the capital
markets. We attempt to mitigate these risks by investing
primarily in high credit quality securities with AAA and AA
ratings and short-term securities with an
A-1 rating,
limiting the amount that can be invested in any single issuer,
and by investing in short to intermediate term investments whose
market value is less sensitive to interest rate changes. As of
February 1, 2008, we did not hold any auction rate
securities; at February 2, 2007, we held auction rate
securities that had a carrying value of $255 million. The
total carrying value of investments in asset-backed and
mortgage-backed debt securities was approximately
$550 million. Based on our investment portfolio and
interest rates at February 1, 2008, a 100 basis point
increase or decrease in interest rates would result in a
decrease or increase of approximately $33 million in the
fair value of the investment portfolio.
We periodically review our investment portfolio to determine if
any investment is
other-than-temporarily
impaired due to changes in credit risk or other potential
valuation concerns. During the second quarter of
Fiscal 2009, we recorded a $10 million loss based on a
review of factors consistent with those disclosed in Note 2
of Notes to Annual Consolidated Financial Statements. At
February 1, 2008, the fair value of securities below their
carrying value was $155 million. The unrealized loss of
$9 million related to these securities has been recorded in
other comprehensive income (loss), as we believed the
investments were not
other-than-temporarily
impaired. While certain
available-for-sale
securities had market values below cost, we believed it was
probable that the principal and interest will be collected in
accordance with the contractual terms, and that the decline in
the market value is exacerbated by the overall credit concerns
in the market. Factors considered in determining whether a loss
is
other-than-temporary
include the length of time and extent to which fair value has
been less than the cost basis; the underlying collateral, agency
ratings, and future cash flows; and our intent and ability to
hold the investment for a period of time sufficient to allow for
any anticipated recovery in fair value. Our assessment that an
investment is not
other-than-temporarily
impaired could change in the future due to new developments or
changes in any particular investment.
The fair value of our portfolio was based on quoted market
prices, which we currently believe are indicative of fair value.
The adoption of SFAS No. 157, Fair Value
Measurements (SFAS 157) did not have a
material effect on the consolidated financial statements for the
second quarter and first six months of Fiscal 2009.
Debt
We have entered into interest rate swap arrangements that
convert our fixed interest rate expense to a floating rate basis
to better align the associated interest rate characteristics to
our cash and investments portfolio. The interest rate swaps
qualify for hedge accounting treatment pursuant to
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. We have designated the
issuance of the Senior Notes and Senior Debentures and the
related interest rate swap agreements as an integrated
transaction. The changes in the fair value of the interest rate
swaps are reflected in the carrying value of the interest rate
swap on the balance sheet. The carrying value of the debt on the
balance sheet is adjusted by an equal and offsetting amount. The
differential to be paid or received on the interest rate swap
agreements is accrued and recognized as an adjustment to
interest expense as interest rates change.
61
At August 1, 2008, we had a $1.5 billion commercial
paper program with a supporting $1.5 billion senior
unsecured revolving credit facility. This program allows us to
obtain favorable short-term borrowing rates. At August 1,
2008, there was $100 million outstanding under the
commercial paper program and no outstanding advances under the
related revolving credit facilities. There were no outstanding
advances under the commercial paper program at February 1,
2008. At February 2, 2007, $100 million was
outstanding under the program, and the weighted-average interest
rate on those outstanding short-term borrowings was 5.3%. We use
the proceeds of the program and facility for general corporate
purposes. We believe we will be able to access the capital
markets to increase the size of our existing commercial paper
program and to meet our liquidity needs.
Risk
Factors Affecting Our Business and Prospects
There are numerous risk factors that affect our business and the
results of our operations. Some of these risks are beyond our
control. For a discussion of the risk factors affecting our
business and prospects, see Risk Factors.
Critical
Accounting Policies
We prepare our financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP). The preparation of financial
statements in accordance with GAAP requires certain estimates,
assumptions, and judgments to be made that may affect our
Consolidated Statement of Financial Position and Consolidated
Statement of Income. We believe our most critical accounting
policies relate to revenue recognition, business combinations,
warranty accruals, income taxes, stock-based compensation, and
loss contingencies. We have discussed the development,
selection, and disclosure of our critical accounting policies
with the Audit Committee of our Board of Directors. These
critical accounting policies and our other accounting policies
are also described in Note 1 of Notes to Annual
Consolidated Financial Statements included elsewhere in this
prospectus.
Revenue Recognition and Related Allowances We
frequently enter into sales arrangements with customers that
contain multiple elements or deliverables such as hardware,
software, peripherals, and services. Judgments and estimates are
necessary to ensure compliance with GAAP. These judgments relate
to the allocation of the proceeds received from an arrangement
to the multiple elements, the determination of whether any
undelivered elements are essential to the functionality of the
delivered elements, and the appropriate timing of revenue
recognition. We offer extended warranty and service contracts to
customers that extend
and/or
enhance the technical support, parts, and labor coverage offered
as part of the base warranty included with the product. Revenue
from extended warranty and service contracts, for which we are
obligated to perform, is recorded as deferred revenue and
subsequently recognized over the term of the contract or when
the service is completed. Revenue from sales of third-party
extended warranty and service contracts, for which we are not
obligated to perform, is recognized on a net basis at the time
of sale, as we do not meet the criteria for gross recognition
under Emerging Issues Task Force
99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent.
Estimates also related to revenue recognition relate primarily
to customer sales returns and allowance for doubtful accounts.
Generally, estimates are reasonably predictable based on
historical experience. The primary factors affecting our accrual
for estimated customer returns include estimated return rates as
well as the number of units shipped that still have a right of
return as of the balance sheet date. For sales to retailers, our
accrual for estimated returns is generally based on the
contractual caps specified in the sales arrangements. In the
absence of contractual caps, revenue is deferred until the
product has been sold by the retailer, the return rights expire,
or a reliable estimate of returns can be made. Factors affecting
our allowance for doubtful accounts include historical and
anticipated customer default rates of the various aging
categories of accounts receivable and financing receivables.
Each quarter, we reevaluate our estimates to assess the adequacy
of our recorded accruals for customer returns and allowance for
doubtful accounts, and adjust the amounts as necessary. The
expense associated with the allowance for doubtful accounts is
recognized as selling, general, and administrative expense.
We report revenue net of any revenue-based taxes assessed by
governmental authorities that are imposed on and concurrent with
specific revenue-producing transactions.
Business Combinations and Intangible Assets Including
Goodwill We account for business combinations
using the purchase method of accounting and accordingly, the
assets and liabilities of the acquired entities are
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recorded at their estimated fair values at the acquisition date.
Goodwill represents the excess of the purchase price over the
fair value of net assets, including the amount assigned to
identifiable intangible assets. Given the time it takes to
obtain pertinent information to finalize the acquired
companys balance sheet, it may be several quarters before
we are able to finalize those initial fair value estimates.
Accordingly, it is not uncommon for the initial estimates to be
subsequently revised. The results of operations of acquired
businesses are included in the Consolidated Financial Statements
from the acquisition date.
Identifiable intangible assets with finite lives are amortized
over their estimated useful lives. They are generally amortized
on a non-straight-line approach based on the associated
projected cash flows in order to match the amortization pattern
to the pattern in which the economic benefits of the assets are
expected to be consumed. They are reviewed for impairment if
indicators of potential impairment exist. Goodwill and
indefinite lived intangibles assets are tested for impairment on
an annual basis in the second fiscal quarter, or sooner if an
indicator of impairment occurs.
Warranty We record warranty liabilities at
the time of sale for the estimated costs that may be incurred
under the terms of the limited warranty. The specific warranty
terms and conditions vary depending upon the product sold and
country in which we do business, but generally include technical
support, parts, and labor over a period ranging from one to
three years. Factors that affect our warranty liability include
the number of installed units currently under warranty,
historical and anticipated rates of warranty claims on those
units, and cost per claim to satisfy our warranty obligation.
The anticipated rate of warranty claims is the primary factor
impacting our estimated warranty obligation. The other factors
are less significant due to the fact that the average remaining
aggregate warranty period of the covered installed base is
approximately 20 months, repair parts are generally already
in stock or available at pre-determined prices, and labor rates
are generally arranged at pre-established amounts with service
providers. Warranty claims are reasonably predictable based on
historical experience of failure rates. If actual results differ
from our estimates, we revise our estimated warranty liability
to reflect such changes. Each quarter, we reevaluate our
estimates to assess the adequacy of the recorded warranty
liabilities and adjust the amounts as necessary.
Income Taxes We calculate a provision for
income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized by
identifying the temporary differences arising from the different
treatment of items for tax and accounting purposes. In
determining the future tax consequences of events that have been
recognized in our financial statements or tax returns, judgment
is required. Differences between the anticipated and actual
outcomes of these future tax consequences could have a material
impact on our consolidated results of operations or financial
position.
Stock-Based Compensation Effective
February 4, 2006, we adopted SFAS 123(R) using the
modified prospective transition method which does not require
revising the presentation in prior periods for stock-based
compensation. Under this transition method, stock-based
compensation expense for Fiscal 2008 and Fiscal 2007 includes
compensation expense for all stock-based compensation awards
granted prior to February 4, 2006, but not yet vested at
February 3, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Stock-based
compensation expense for all stock-based compensation awards
granted after February 3, 2006 is based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123(R). We recognize this compensation expense net of
an estimated forfeiture rate over the requisite service period
of the award, which is generally the vesting term of
three-to-five
years for stock options and
three-to-five
years for restricted stock awards. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107
(SAB 107) regarding the SECs
interpretation of SFAS 123(R) and the valuation of
share-based payments for public companies. We have applied the
provisions of SAB 107 in our adoption of SFAS 123(R).
SFAS 123(R) requires the use of a valuation model to
calculate the fair value of stock option awards. We have elected
to use the Black-Scholes option pricing model, which
incorporates various assumptions, including volatility, expected
term, and risk-free interest rates. The volatility is based on a
blend of implied and historical volatility of our common stock
over the most recent period commensurate with the estimated
expected term of our stock options. We use this blend of implied
and historical volatility, as well as other economic data,
because we believe such volatility is more representative of
prospective trends. The expected term of an award is based on
historical experience and on the terms and conditions of the
stock awards granted to employees. The dividend yield of zero is
based on the fact that we have never paid cash dividends and
have no present intention to pay cash dividends.
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The cost of restricted stock awards is determined using the fair
market value of our common stock on the date of grant.
Prior to the adoption of SFAS 123(R), we measured
compensation expense for our employee stock-based compensation
plan using the intrinsic value method prescribed by APB 25. We
applied the disclosure provisions of SFAS 123 such that the
fair value of employee stock-based compensation was disclosed in
the notes to our consolidated financial statements. Under APB
25, when the exercise price of our employee stock options
equaled the market price of the underlying stock at the date of
the grant, no compensation expense was recognized.
Loss Contingencies We are subject to the
possibility of various losses arising in the ordinary course of
business. We consider the likelihood of loss or impairment of an
asset or the incurrence of a liability, as well as our ability
to reasonably estimate the amount of loss, in determining loss
contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has
been incurred and the amount of loss can be reasonably
estimated. We regularly evaluate current information available
to us to determine whether such accruals should be adjusted and
whether new accruals are required. Third parties have in the
past and may in the future assert claims or initiate litigation
related to exclusive patent, copyright, and other intellectual
property rights to technologies and related standards that are
relevant to us. If any infringement or other intellectual
property claim made against us by any third party is successful,
or if we fail to develop non-infringing technology or license
the proprietary rights on commercially reasonable terms and
conditions, our business, operating results, and financial
condition could be materially and adversely affected.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 157, Fair Value
Measurements (SFAS 157), which defines fair
value, provides a framework for measuring fair value, and
expands the disclosures required for assets and liabilities
measured at fair value. SFAS 157 applies to existing
accounting pronouncements that require fair value measurements;
it does not require any new fair value measurements. Dell
adopted the effective portions of SFAS 157 beginning the
first quarter of Fiscal 2009. In February 2008, FASB issued FASB
Staff Position (FSP)
157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2),
which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of Fiscal 2010. Dell is
currently evaluating the inputs and techniques used in these
measurements, including such items such as impairment
assessments of fixed assets and goodwill impairment testing. The
adoption of this statement did not have a material effect on the
consolidated financial statements for the first six months of
Fiscal 2009. The amount of assets and liabilities measured at
fair value on a recurring basis based on unobservable inputs
(Level 3) are not significant relative to our balance
sheet. See Note 6 of Notes to Quarterly Condensed
Consolidated Financial Statements included elsewhere in this
prospectus.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which provides companies with an
option to report selected financial assets and liabilities at
fair value with the changes in fair value recognized in earnings
at each subsequent reporting date. SFAS 159 provides an
opportunity to mitigate potential volatility in earnings caused
by measuring related assets and liabilities differently, and it
may reduce the need for applying complex hedge accounting
provisions. While SFAS 159 became effective for Dells
2009 fiscal year, Dell did not elect the fair value measurement
option for any of its financial assets or liabilities. In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)).
SFAS 141(R) requires that the acquisition method of
accounting be applied to a broader set of business combinations
and establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill
acquired. SFAS 141(R) also establishes the disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141(R)
is effective for fiscal years beginning after December 15,
2008 and is required to be adopted by us beginning in the first
quarter of Fiscal 2010. We are currently evaluating the impact
that SFAS 141(R) may have on our results of operations,
financial position, and cash flows.
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In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that the
noncontrolling interest in the equity of a subsidiary be
accounted for and reported as equity, provides revised guidance
on the treatment of net income and losses attributable to the
noncontrolling interest and changes in ownership interests in a
subsidiary, and requires additional disclosures that identify
and distinguish between the interests of the controlling and
noncontrolling owners. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008 and is required to be adopted by us
beginning in the first quarter of Fiscal 2010. We do not expect
SFAS 160 to have an impact on our results of operations,
financial position, and cash flows.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161), which requires additional
disclosures about the objectives of derivative instruments and
hedging activities, the method of accounting for such
instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(SFAS 133) and its related interpretations, and
a tabular disclosure of the effects of such instruments and
related hedged items on a companys financial position,
financial performance, and cash flows. SFAS No. 161
does not change the accounting treatment for derivative
instruments and is effective for Dell beginning Fiscal 2010.
Management is currently evaluating the impact of the disclosure
requirements of SFAS 161.
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BUSINESS
General
Dell listens to customers and delivers innovative technology and
services they trust and value. As a leading technology company,
we offer a broad range of product categories, including desktop
PCs, notebooks, software and peripherals, servers and networking
products, services, and storage. According to IDC, we are the
number one supplier of personal computer systems in the United
States, and the number two supplier worldwide.
Our company is a Delaware corporation and was founded in 1984 by
Michael Dell on a simple concept: by selling computer systems
directly to customers, we can best understand their needs and
efficiently provide the most effective computing solutions to
meet those needs. Our corporate headquarters are located in
Round Rock, Texas, and we conduct operations worldwide through
subsidiaries. When we refer to our company and its business in
this report, we are referring to the business and activities of
our consolidated subsidiaries. We operate principally in one
industry, and we manage our business in four operating segments:
Americas Commercial; Europe, Middle East and Africa
(EMEA) Commercial; Asia Pacific-Japan
(APJ) Commercial; and Global Consumer. See
Operating Business Segments.
We are committed to managing and operating our business in a
responsible and sustainable manner around the globe. This
includes our commitment to environmental responsibility in all
areas of our business. In June 2007, we announced an ambitious
long-term goal to be the greenest technology company on
the planet and have a number of efforts that take the
environment into account at every stage of the product
lifecycle. See Sustainability. This also
includes our focus on maintaining a strong control environment,
high ethical standards, and financial reporting integrity.
Business
Strategy
Our core business strategy is built around our direct customer
model, relevant technologies and solutions, and highly efficient
manufacturing and logistics; and we are expanding that core
strategy by adding new distribution channels to reach even more
commercial customers and individual consumers around the world.
Using this strategy, we strive to provide the best possible
customer experience by offering superior value; high-quality,
relevant technology; customized systems and services; superior
service and support; and differentiated products and services
that are easy to buy and use. Historically, our growth has been
driven organically from our core businesses. Recently, we have
begun to pursue a targeted acquisition strategy designed to
augment select areas of our business with more products,
services, and technology that our customers value. For example,
with our recent acquisition of EqualLogic, Inc., a leading
provider of high-performance storage area network solutions, and
the subsequent expansion of Dells PartnerDirect channel,
we are ready to deliver customers an easier and more affordable
solution for storing and processing data.
Our core values include the following:
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We simplify information technology for customers. Making
quality personal computers, servers, storage, and services
affordable is Dells legacy. We are focused on making
information technology affordable for millions of customers
around the world. As a result of our direct relationships with
customers, or customer intimacy, we are best
positioned to simplify how customers implement and maintain
information technology and deliver hardware, services, and
software solutions tailored for their businesses and homes.
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We offer customers choice. Customers can purchase systems
and services from Dell via telephone, at a growing number of
retail stores, and through our website, www.dell.com, where they
may review, configure, and price systems within our entire
product line; order systems online; and track orders from
manufacturing through shipping. Customers may offer suggestions
for current and future Dell products and services through an
interactive portion of our website called Dell IdeaStorm.
Commercial customers also can interact with dedicated account
teams. We plan to continue to expand our recently launched
indirect initiative by adding new distribution channels to reach
additional consumers and small businesses through retail
partners and value-added resellers globally.
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Customers can purchase custom-built products and
custom-tailored services. Historically our flexible,
build-to-order manufacturing process enabled us to turn over
inventory quickly, thereby reducing inventory levels, and
rapidly bring the latest technology to our customers. The global
IT industry and our competition have evolved, and we are
continuing to expand our utilization of original design
manufacturers, manufacturing outsourcing relationships, and new
distribution strategies to better meet customer needs and reduce
product cycle times. Our goal is to introduce the latest
relevant technology more quickly and to rapidly pass on
component cost savings to a broader set of our customers
worldwide.
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We are committed to being environmentally responsible in all
areas of our business. We have built environmental
consideration into every stage of the Dell product life
cycle from developing and designing energy-efficient
products, to reducing the footprint of our manufacturing and
operations, to customer use and product recovery.
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Product
Development
We focus on developing standards-based technologies that
incorporate highly desirable features and capabilities at
competitive prices. We employ a collaborative approach to
product design and development, where our engineers, with direct
customer input, design innovative solutions and work with a
global network of technology companies to architect new system
designs, influence the direction of future development, and
integrate new technologies into our products. Through this
collaborative, customer-focused approach, we strive to deliver
new and relevant products and services to the market quickly and
efficiently. Our research, development, and engineering expenses
were $693 million for Fiscal 2008, $498 million for
Fiscal 2007, and $458 million for Fiscal 2006, including
in-process research and development of $83 million related
to acquisitions in Fiscal 2008.
Products
and Services
We design, develop, manufacture, market, sell, and support a
wide range of products that in many cases are customized to
individual customer requirements. Our product categories include
desktop PCs, servers and networking products, storage, mobility
products, and software and peripherals. In addition, we offer a
wide range of services. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Revenue by Product and Service
Categories and Note 11 of each of Notes to Annual
Consolidated Financial Statements and Notes to Quarterly
Condensed Consolidated Financial Statements included elsewhere
in this prospectus.
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Desktop PCs The
XPStm
and Alienware lines are targeted at customers seeking the best
experiences and designs available, from multimedia capability to
the highest gaming performance. The
OptiPlextm
line is designed to help business, government, and institutional
customers manage their total cost of ownership by offering a
portfolio of secure, manageable, and stable lifecycle products.
The
Inspirontm
line of desktop computers is designed for mainstream PC users
requiring the latest features for their productivity and
entertainment needs. In July 2007, we introduced the
Vostrotm
line, which is designed to provide technology and services to
suit the specific needs of small businesses.
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Dell
Precisiontm
desktop workstations are intended for professional users who
demand exceptional performance from hardware platforms optimized
and certified to run sophisticated applications, such as those
needed for three-dimensional computer-aided design, digital
content creation, geographic information systems, computer
animation, software development, computer-aided engineering,
game development, and financial analysis.
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Servers and Networking Our standards-based
PowerEdgetm
line of servers is designed to offer customers affordable
performance, reliability, and scalability. Options include high
performance rack, blade, and tower servers for enterprise
customers and aggressively priced tower servers for small
organizations, networks, and remote offices. We also offer
customized Dell server solutions for very large data center
customers.
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Our
PowerConnecttm
switches connect computers and servers in small-to-medium-sized
networks.
PowerConnecttm
products offer customers enterprise-class features and
reliability at a low cost.
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Storage We offer a comprehensive portfolio of
advanced storage solutions, including storage area networks,
network-attached storage, direct-attached storage, disk and tape
backup systems, and removable disk backup. With our advanced
storage solutions for mainstream buyers, we offer customers
functionality and value while reducing complexity in the
enterprise. Our storage systems are easy to deploy, manage, and
maintain. The flexibility and scalability offered by Dell
PowerVaulttm,
Dell EqualLogic, and Dell | EMC storage systems helps
organizations optimize storage for diverse environments with
varied requirements.
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Mobility The
XPStm
and Alienware lines of notebook computers are targeted at
customers seeking the best experiences and designs available
from sleek, elegant, thin, and light notebooks to the highest
performance gaming systems. In Fiscal 2008, we introduced the
XPS M1330, an innovative mobile platform featuring a 13.3-inch
high definition display and ultra-portable form factor that
received awards for its unique design. The
Inspirontm
line of notebook computers is designed for users seeking the
latest technology and high performance in a stylish and
affordable package. The
Latitudetm
line is designed to help business, government, and institutional
customers manage their total cost of ownership through managed
product lifecycles and the latest offerings in performance,
security, and communications. The
Vostrotm
line, introduced in July 2007, is designed to customize
technology, services, and expertise to suit the specific needs
of small businesses. The
Precisiontm
line of mobile workstations is intended for professional users
who demand exceptional performance to run sophisticated
applications.
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Software and Peripherals We offer
Dell-branded printers and displays and a multitude of
competitively priced third-party peripheral products, including
software titles, printers, televisions, notebook accessories,
networking and wireless products, digital cameras, power
adapters, scanners, and other products.
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Software. We sell a wide range of third-party software
products, including operating systems, business and office
applications, anti-virus and related security software,
entertainment software, and products in various other
categories. We finalized the acquisition of ASAP Software
Express Inc., a leading software solutions and licensing
services provider, in the fourth quarter of Fiscal 2008. As a
result of this acquisition, we now offer products from over
2,000 software publishers.
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Printers. We offer a wide array of Dell-branded printers,
ranging from ink-jet
all-in-one
printers for consumers to large multifunction devices for
corporate workgroups. All of our printers feature the Dell Ink
and Toner Management
Systemtm,
which simplifies the purchasing process for supplies by
displaying ink or toner levels on the status window during every
print job and proactively prompting users to order replacement
cartridges directly from Dell.
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Displays. We offer a broad line of branded and
non-branded display products, including flat panel monitors and
projectors. In Fiscal 2008, we extended our consumer monitor
line-up and
introduced new innovations such as True Life and
integrated camera and microphone into some of our monitors. We
added the 1201MP projector to our existing projector portfolio.
Across our monitors and projector product lines, we continue to
win awards for quality, performance, and value.
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Services Our global services business offers
a broad range of configurable IT services that help commercial
customers and channel partners plan, implement and manage IT
operations and consumers install, protect, and maintain their
PCs and accessories. Our service solutions help customers
simplify IT, maximizing the performance, reliability, and
cost-effectiveness of IT operations. During Fiscal 2008, we
acquired a number of service technologies and capabilities
through strategic acquisitions of certain companies. These are
being used to build-out our service capabilities.
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Infrastructure Consulting Services. Our consulting
services help customers evaluate, design, and implement
standards-based IT infrastructures. These customer-oriented
consulting services are designed to be focused and efficient,
providing customers access to our experience and guidance on how
to best architect and operate IT operations.
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Deployment Services. Our deployment services simplify and
accelerate the deployment of new systems, PCs, and TVs in
customers environments. Our processes and deployment
technologies enable customers to get systems up and running
quickly and reliably, with minimal end-user disruption.
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Asset Recovery and Recycling Services. We offer a variety
of flexible services for the secure and environmentally safe
recovery and disposal of owned and leased IT equipment. Various
options, including resale, recycling, donation, redeployment,
employee purchase, and lease return, help customers retain value
while facilitating regulatory compliance and minimizing storage
costs.
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Training Services. We help customers develop the skills
and knowledge of key technologies and systems needed to increase
their productivity. Courses include hardware and software
training as well as PC skills and professional development
classes available through instructor-led, virtual, or
self-directed online courses.
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Support Services. Our suite of scalable support services
is designed for IT professionals and end-users whose needs range
from basic phone support to rapid response and resolution of
complex problems. We offer flexible levels of support that span
from desktop and notebook PCs to complex servers and storage
systems, helping customers maximize uptime and stay productive.
Our support services include warranty services and proactive
maintenance offerings to help prevent problems as well as rapid
response and resolution of problems. These services are
supported by our network of Global Command Centers in the U.S.,
Ireland, China, Japan, and Malaysia, providing rapid,
around-the-clock support for critical commercial systems.
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Managed Services. We offer a full suite of managed
service solutions for companies who desire outsourcing of some
or all of their IT management. From planning to deployment to
ongoing technical support, our managed services are modular in
nature so that customers can customize a plan based on their
current and future needs. We can manage a portion of their IT
tasks or provide an end-to-end solution.
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Financial
Services
We offer or arrange various customer financial services for our
business and consumer customers in the U.S. through Dell
Financial Services L.P. (DFS), a wholly-owned
subsidiary of Dell as of January 2008. DFS was formerly a joint
venture between Dell and CIT Group Inc. (CIT), and
has been included in our consolidated financial statements since
the third quarter of Fiscal 2004. On December 31, 2007, we
purchased CITs remaining 30% interest in DFS, making it a
wholly-owned subsidiary. Financing through DFS is one of many
sources of funding that our customers may select. For additional
information about our financing arrangements, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Off-Balance
Sheet Arrangements and Note 6 of Notes to Annual
Consolidated Financial Statements and Note 5 of Notes to
Quarterly Condensed Consolidated Financial Statements included
elsewhere in this prospectus.
Sales and
Marketing
We sell our products and services directly to customers through
dedicated sales representatives, telephone-based sales, online
at www.dell.com, and through a variety of indirect sales
channels. Our customers include large corporate, government,
healthcare, and education accounts, as well as small-to-medium
businesses and individual consumers. Within each of our
geographic regions, we have divided our sales and marketing
resources among these various customer groups. No single
customer accounted for more than 10% of our consolidated net
revenue during any of the last three fiscal years.
Our sales and marketing efforts are organized around the needs,
trends, and characteristics of our customers. Our direct
business model provides direct and continuous feedback from
customers, thereby allowing us to develop and refine our
products and marketing programs for specific customer groups.
Customers may offer suggestions for current and future Dell
products, services, and operations on an interactive portion of
our website called Dell
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IdeaStorm. This constant flow of communication allows us to
rapidly gauge customer satisfaction and target new or existing
products.
For large business and institutional customers, we maintain a
field sales force throughout the world. Dedicated account teams,
which include field-based system engineers and consultants, form
long-term relationships to provide our largest customers with a
single source of assistance and develop specific tailored
solutions for these customers. For large, multinational
customers, we offer several programs designed to provide single
points of contact and accountability with global account
specialists, special global pricing, and consistent service and
support programs across all global regions. We also maintain
specific sales and marketing programs targeted at federal,
state, and local governmental agencies, as well as at specific
healthcare and educational customers.
We market our products and services to small-to-medium
businesses and consumers primarily by advertising on television
and the Internet, advertising in a variety of print media, and
mailing a broad range of direct marketing publications, such as
promotional pieces, catalogs, and customer newsletters.
Our business strategy also includes indirect sales channels.
Outside the U.S., we sell products indirectly through selected
partners to benefit from the partners existing customer
relationships and valuable knowledge of traditional customs and
logistics in the country, to mitigate credit and country risk,
and because sales in some countries may be too small to warrant
a direct sales business unit. In the U.S., we sell products
indirectly through third-party solution providers, system
integrators, and third-party resellers. In Fiscal 2008, we
announced PartnerDirect, a global program that brings our
existing partner initiatives under one umbrella in the
U.S. PartnerDirect includes partner training and
certification, deal registration, dedicated sales and customer
care, and a dedicated web portal. We intend to expand the
program globally. Continuing our strategy and efforts of better
meeting customers needs and demands, we began offering
select products in retail stores in several countries in the
Americas, EMEA, and APJ during Fiscal 2008. These actions
represent the first steps in our retail strategy, which will
allow us to extend our business model to reach customers that we
have not been able to reach directly.
Competition
We face intense price and product feature competition from
branded and generic competitors when selling our products and
services. In addition to several large branded companies, there
are other smaller branded and generic competitors. Historically,
we competed primarily based on the customer value that a direct
relationship can bringtechnology, performance, customer
service, quality, and reliability. Our general practice is to
rapidly pass on cost declines to our customers to enhance
customer value.
As a result of the intensely competitive environment, we lost
1.9 points of share during calendar 2007. We lost share, both in
the U.S. and internationally, as our growth did not meet
overall personal computer systems growth. This was mainly due to
intense competitive pressure in our Global Consumer business,
particularly in lower priced desktops and notebooks, as well as
a slight decline in our worldwide desktop shipments (compared to
5% worldwide industry growth in desktops). At the end of
calendar 2007, we remained the number one supplier of personal
computer systems in the U.S. and the number two supplier
worldwide.
We expect that the competitive pricing environment will continue
to be challenging. However, we believe that the strength of our
evolving business strategy and indirect distribution channels,
as well as our strong liquidity position, makes us well
positioned to continue profitable growth over the long term in
any business climate. For consumers, we recognize the increasing
importance of product ID, which is the appearance,
ease of use, and ability to interact with peripheral products
like cameras and MP3 players, and we are focusing more resources
to improve in this area.
In our financial services business we compete with the captive
financing businesses of some of our competitors as well as with
banks and financial institutions. While DFS is one of the many
potential sources for arranging funding that may be available to
our customers, we believe that our ability to offer or arrange
financing for products, services, and solutions makes us
competitive with banks and financial institutions.
70
Manufacturing
and Materials
We manufacture many of the products we sell and have
manufacturing locations worldwide to service our global customer
base. See Properties for information
about our manufacturing locations. We believe that our
manufacturing processes and supply-chain management techniques
provide us a competitive advantage.
Our manufacturing process consists of assembly, software
installation, functional testing, and quality control. Testing
and quality control processes are also applied to components,
parts, sub-assemblies, and systems obtained from third-party
suppliers. Quality control is maintained through the testing of
components, subassemblies, and systems at various stages in the
manufacturing process. Quality control also includes a burn-in
period for completed units after assembly, on-going production
reliability audits, failure tracking for early identification of
production and component problems, and information from
customers obtained through services and support programs. We are
certified, worldwide, by the International Standards
Organization to the requirements of ISO 9001: 2000. This
certification includes our design, manufacture, and service of
computer products in all of our locations.
We have relationships with third-party original equipment
manufacturers that build some of our products to our
specifications. In addition, we are continuing to expand our use
of original design manufacturing partnerships and manufacturing
outsourcing relationships in order to generate cost
efficiencies, deliver products faster, and better serve our
customers in certain segments and geographical areas.
We purchase materials, supplies, product components, and
products from a large number of vendors. In some cases, multiple
sources of supply are not available and we have to rely on
single-source vendors. In other cases, we may establish a
working relationship with a single source or a limited number of
sources if we believe it is advantageous due to performance,
quality, support, delivery, capacity, or price considerations.
This relationship and dependency has not caused material
disruptions in the past, and we believe that any disruptions
that may occur because of our dependency on single- or
limited-source vendors would not disproportionately disadvantage
us relative to our competitors. See Risk Factors for
information about the risks associated with single- or
limited-sourced suppliers.
Patents,
Trademarks, and Licenses
As of August 1, 2008, we held a worldwide portfolio of
2,109 patents and had an additional 2,429 patent
applications pending. We also hold licenses to use numerous
third party patents. To replace expiring patents, we obtain new
patents through our ongoing research and development activities.
The inventions claimed in our patents and patent applications
cover aspects of our current and possible future computer system
products, manufacturing processes, and related technologies. Our
product, business method, and manufacturing process patents may
establish barriers to entry in many product lines. While we use
our patented inventions and also license them to others, we are
not substantially dependent on any single patent or group of
related patents. We have entered into a variety of intellectual
property licensing and cross-licensing agreements. We have also
entered into various software licensing agreements with other
companies. We anticipate that our worldwide patent portfolio
will be of value in negotiating intellectual property rights
with others in the industry.
We have obtained U.S. federal trademark registration for
the DELL word mark and the Dell logo mark. We own registrations
for 66 of our other marks in the U.S. At February 1,
2008, we had pending applications for registration of 47 other
trademarks. We believe that establishment of the DELL word mark
and logo mark in the U.S. is material to our operations. We
have also applied for or obtained registration of the DELL mark
and several other marks in approximately 184 other countries.
We have entered into a variety of intellectual property
licensing and cross-licensing agreements. We have also entered
into various software licensing agreements with a variety of
other companies.
From time to time, other companies and individuals assert
exclusive patent, copyright, trademark, or other intellectual
property rights to technologies or marks that are important to
the technology industry or our business. We evaluate each claim
relating to our products and, if appropriate, seek a license to
use the protected technology. The licensing agreements generally
do not require the licensor to assist us in duplicating its
patented technology, nor
71
do these agreements protect us from trade secret, copyright, or
other violations by us or our suppliers in developing or selling
these products.
Employees
At the end of Fiscal 2008, we had approximately 88,200 total
employees (consisting of 82,700 regular employees and 5,500
temporary employees), compared to approximately 91,500 total
employees (consisting of 83,100 regular employees, 7,200
temporary employees, and 1,200 DFS employees) at the end of
Fiscal 2007. In December 2007, we purchased CIT Group
Inc.s 30% interest in DFS. As such, the total of regular
employees at February 1, 2008, includes DFS employees.
Approximately 29,300 of the regular employees at the end of
Fiscal 2008 were located in the U.S., and approximately 53,400
were located in other countries.
In the first quarter of Fiscal 2008, we initiated a
comprehensive review of costs across all processes and
organizations, from product development and procurement through
service and support delivery, with the goal to simplify
structure, eliminate redundancies, and better align operating
expenses with the current business environment and strategic
growth opportunities. As part of this overall effort, we expect
to further reduce headcount, exclusive of additions due to
acquisitions.
Government
Regulation and Environment
Our business is subject to regulation by various federal and
state governmental agencies. Such regulation includes the radio
frequency emission regulatory activities of the
U.S. Federal Communications Commission; the anti-trust
regulatory activities of the U.S. Federal Trade Commission,
the Department of Justice, and the European Union; the consumer
protection laws of the Federal Trade Commission; the export
regulatory activities of the U.S. Department of Commerce
and the U.S. Department of Treasury; the import regulatory
activities of U.S. Customs and Border Protection; the
product safety regulatory activities of the U.S. Consumer
Product Safety Commission; and environmental regulation by a
variety of regulatory authorities in each of the areas in which
we conduct business. We are also subject to regulation in other
countries where we conduct business. We were not assessed any
environmental fines, nor did we have any material environmental
remediation or other environmental costs during Fiscal 2008.
Sustainability
Our focus on business efficiencies and customer satisfaction
drives our environmental stewardship program in all areas of our
business reducing product energy consumption,
reducing or eliminating materials for disposal, prolonging
product life spans, and providing effective and convenient
equipment recovery solutions. We are committed to becoming the
greenest technology company on the planet, a
long-term initiative we announced in June 2007. This
multi-faceted campaign focuses on driving internal business
innovations and efficiencies, enhancing customer satisfaction,
and partnering with suppliers and people of all ages who care
about the environment.
In Fiscal 2008, we announced our commitment to becoming carbon
neutral in calendar year 2008. In partnership with The
Conservation Fund and Carbonfund.org, we launched the
Plant a Tree for Me program, which enables customers
to offset the electricity required to power their computers. We
also extended our commitment to design the most energy efficient
products in our industry. Several of our workstations, desktops
and notebooks met Energy Star 4.0 ahead of a deadline set by the
EPA. We are a founding partner of Green Grid, a global
consortium dedicated to developing and promoting energy
efficiency for data centers and information services.
We are committed to making recycling free and easy, and remain
focused on raising consumer awareness about the importance of
recycling and increasing the volume of products we recover from
consumers. During Fiscal 2007, we voluntarily initiated a
no-charge recycling program for our U.S. customers. This
recycling offer is designed for consumers and includes
responsible recycling of used Dell-branded computers and
peripheral equipment at no-charge; this service does not require
a replacement purchase. We also help commercial customers
responsibly and securely manage the retirement of used
information technology through our product recovery services.
Since November 2003, we have offered a no-charge recycling
program for Dell-branded products in Europe and also currently
offer no-charge consumer recycling in Canada. Since 2004, we
have offered
72
U.S. consumers no-charge recycling of any brand of used
computer or printer with the purchase of a new Dell computer or
printer.
Backlog
We believe that backlog is not a meaningful indicator of net
revenue that can be expected for any period. There can be no
assurance that the backlog at any point in time will translate
into net revenue in any subsequent period, as unfilled orders
can generally be canceled at any time by the customer. Our
business model generally gives us flexibility to manage backlog
at any point in time by expediting shipping or prioritizing
customer orders toward products that have shorter lead times,
thereby reducing backlog and increasing current period revenue.
Even though backlog at the end of Fiscal 2008 was considerably
higher than at the end of Fiscal 2007 and 2006, it was not
material.
Operating
Business Segments
We conduct operations worldwide. Effective the first quarter of
Fiscal 2009, we combined our consumer businesses of EMEA, APJ,
and Americas International (formerly reported through Americas
Commercial) with our U.S. Consumer business and re-aligned
our management and financial reporting structure. As a result,
effective in the first quarter of Fiscal 2009, our operating
structure consisted of the following four segments: Americas
Commercial, EMEA Commercial, APJ Commercial, and Global
Consumer. Our commercial business includes sales to corporate,
government, healthcare, education, small and medium business
customers, and value-added resellers and is managed through the
Americas Commercial, EMEA Commercial, and APJ Commercial
segments. The Americas Commercial segment, which is based in
Round Rock, Texas, encompasses the U.S., Canada, and Latin
America. The EMEA Commercial segment, based in Bracknell,
England, covers Europe, the Middle East, and Africa. The APJ
Commercial segment, based in Singapore, encompasses the Asian
countries of the Pacific Rim as well as Australia, New Zealand,
and India. The Global Consumer segment, which is based in Round
Rock, Texas, includes global sales and product development for
individual consumers and retailers around the world. We revised
previously reported operating segment information to conform to
our new operating structure in effect during the first quarter
of Fiscal 2009.
We have invested in high growth countries such as Brazil,
Russia, India, and China to design, manufacture, and support our
customers, and we expect to continue our global expansion in the
years ahead. Our investment in international growth
opportunities contributed to an increase in
non-U.S. revenue,
as a percentage of consolidated net revenue, from 44% in Fiscal
2007 to 47% during Fiscal 2008, representing 14% year-over-year
growth. Our continued expansion outside of the U.S. creates
additional complexity in coordinating the design, development,
procurement, manufacturing, distribution, and support of our
increasingly complex product and service offerings. As a result,
we plan to continue to add additional resources to our offices
in Singapore to better coordinate certain global activities,
including the management of our original design manufacturers
and utilization of
non-U.S. Dell
and supplier production capacity where most needed in light of
product demand levels that vary by region. The expanded global
operations in Singapore also coordinate product design and
development efforts with procurement activities and sources of
supply. We intend to continue to expand our global
infrastructure as our international business continues to grow.
For financial information about the results of our reportable
operating segments for each of the last three fiscal years and
for the three and six month periods ended August 1, 2008,
see Note 11 of each of Notes to Annual Consolidated
Financial Statements and Notes to Quarterly Condensed
Consolidated Financial Statements, respectively, included
elsewhere in this prospectus.
Our corporate headquarters are located in Round Rock, Texas. Our
manufacturing and distribution facilities are located in Austin,
Texas; Winston-Salem, North Carolina; Lebanon and Nashville,
Tennessee; Miami, Florida; Limerick and Athlone, Ireland;
Penang, Malaysia; Xiamen, China; Hortolândia, Brazil;
Chennai, India; and Lodz, Poland. During Fiscal 2008, we opened
business centers in Quezon City, Philippines and Kuala Lumpur,
Malaysia. For additional information see
Properties below.
73
Properties
At August 1, 2008, we owned or leased a total of
approximately 16.9 million square feet of office,
manufacturing, and warehouse space worldwide, approximately
7.4 million square feet of which is located in the
U.S. and the remainder of which is located in other
countries. We believe our existing properties are suitable and
adequate for our current needs and that we can readily meet our
requirements for additional space at competitive rates by
extending expiring leases or by finding alternative space.
Our principal executive offices, including global headquarters,
are located at One Dell Way, Round Rock, Texas, United States of
America. The locations of our headquarters of geographic
operations at August 1, 2008 were as follows:
|
|
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Americas
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Europe, Middle East, Africa
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Asia Pacific, including Japan
|
Round Rock, Texas
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Bracknell, England
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Singapore
|
Americas
Properties
|
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|
|
|
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|
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Description
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Principal Locations
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Owned (square feet)
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|
Leased (square feet)
|
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Headquarters
|
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|
n Round
Rock, Texas
|
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|
2.1 million
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|
|
|
|
|
|
|
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|
|
|
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|
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Business
Centers(a)
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n Brazil,
El Dorado Do Sul
n El
Salvador - San Salvador
n Oklahoma
- Oklahoma City
n Panama
- Panama City
n Tennessee
- Nashville
n Texas
- Austin and Round Rock
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1.1 million
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|
|
|
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1.7 million
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
and Distribution
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n Brazil
- Hortolândia
n Florida
- Miami (Alienware)
n North
Carolina - Winston - Salem
n Tennessee
- Lebanon and Nashville
n Texas
- Austin
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2.9 million
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0.1 million
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|
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|
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Design Centers
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n Texas
- Austin and Round Rock
n New
Hampshire - Nashua
n California
- San Jose
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0.7 million
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0.2 million
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|
|
|
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|
|
|
|
|
|
EMEA
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
Principal Locations
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|
Owned (square feet)
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|
|
|
Leased (square feet)
|
|
Headquarters
|
|
|
n Bracknell,
England
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|
0.1 million
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|
|
|
|
|
|
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|
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|
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|
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|
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Business
Centers(a)
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n Germany
- Halle
n France
- Montpellier
n Ireland
- Dublin and Limerick
n Morocco
- Casablanca
n Slovakia
- Bratislava
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0.4 million
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1.6 million
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Manufacturing and Distribution
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n Ireland
- Limerick and Athlone
(Alienware)
n Poland
- Lodz
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1.0 million
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74
APJ
Properties
|
|
|
|
|
|
|
|
|
|
|
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|
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Description
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|
|
Principal Locations
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|
|
Owned (square feet)
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Leased (square feet)
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|
Headquarters
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n Singapore
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25,000
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Business
Centers(a)
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n China
Dalian and Xiamen
n India
Bangalore, Gurgaon,
Hyderabad
and Mohali
n Japan
Kawasaki
n Malaysia
Penang and Kuala Lumpur
n Philippines
Metro Manila
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0.3 million
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|
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|
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2.9 million
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|
|
|
|
|
|
|
|
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|
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|
|
|
Manufacturing and Distribution
|
|
|
n China
Xiamen
n Malaysia
Penang
n India
Chennai
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1.1 million
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|
|
|
|
|
|
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Design Centers
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n China
Shanghai
n India
Bangalore
n Singapore
n Taiwan
Taipei
|
|
|
|
|
|
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0.7 million
|
|
|
|
|
|
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(a)
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Business center locations include
facilities with capacity greater than 1,000 people.
Operations within these centers include sales, technical
support, administrative, and support functions. Locations of
smaller business centers are not listed; however, the smaller
centers are included in the square footage.
|
In general, our Americas, EMEA, and APJ regions use properties
within their geographies. However, business centers in the
Philippines and India, which house sales, customer care,
technical support, and administrative support functions, are
used by each of our geographic regions. During Fiscal 2008, Dell
opened manufacturing plants in Hortolândia, Brazil;
Chennai, India; and Lodz, Poland. In addition, business centers
were opened in Quezon City, Philippines and Kuala Lumpur,
Malaysia. Manufacturing operations in El Dorado Do Sul, Brazil
were relocated to the new plant in Hortolândia; however,
the site continues in use as a business center. Business centers
in McGregor, Texas and Roseburg, Oregon were closed during
Fiscal 2008. During the second quarter of Fiscal 2009 we
executed a lease for approximately 200,000 square feet of
office space under construction in Casablanca, Morocco that is
not reflected above. The building is planned to be completed in
early Fiscal 2011. During the first half of Fiscal 2009, we
closed and sold the 128,000 square foot business center in
Edmonton, Canada.
Trademarks
and Service Marks
Unless otherwise noted, trademarks appearing in this report are
trademarks owned by us. We disclaim proprietary interest in the
marks and names of others. EMC is a registered trademark of EMC
Corporation.
Legal
Proceedings
Dell is involved in various claims, suits, investigations, and
legal proceedings. As required by SFAS No. 5,
Accounting for Contingencies (SFAS 5),
Dell accrues a liability when it believes that it is both
probable that a liability has been incurred and that it can
reasonably estimate the amount of the loss. Dell reviews these
accruals at least quarterly and adjusts them to reflect ongoing
negotiations, settlements, rulings, advice of legal counsel, and
other relevant information. However, litigation is inherently
unpredictable. Therefore, Dell could incur judgments or enter
into settlements of claims that could adversely affect its
operating results or cash flows in a particular period. The
following is a discussion of Dells significant legal
matters.
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n
|
Investigations and Related Litigation In
August 2005, the SEC initiated an inquiry into certain of
Dells accounting and financial reporting matters and
requested that Dell provide certain documents. The SEC expanded
that inquiry in June 2006 and entered a formal order of
investigation in October 2006. The SECs requests for
information were joined by a similar request from the United
States Attorney for the Southern District of New York
(SDNY), who subpoenaed documents related to
Dells
|
75
|
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financial reporting from and after Fiscal 2002. In August 2006,
because of potential issues identified in the course of
responding to the SECs requests for information,
Dells Audit Committee, on the recommendation of management
and in consultation with PricewaterhouseCoopers LLP, Dells
independent registered public accounting firm, initiated an
independent investigation, which was completed in the third
quarter of Fiscal 2008. Although the Audit Committee
investigation has been completed, the investigations being
conducted by the SEC and the SDNY are ongoing. Dell continues to
cooperate with the SEC and the SDNY.
|
Dell and several of its current and former directors and
officers are parties to securities, Employee Retirement Income
Security Act of 1974 (ERISA), and shareholder
derivative lawsuits all arising out of the same events and facts.
Four putative securities class actions that were filed in the
Western District of Texas, Austin Division, against Dell and
certain of its current and former officers have been
consolidated as In re Dell Securities Litigation, and a
lead plaintiff has been appointed by the court. The lead
plaintiff has asserted claims under sections 10(b), 20(a),
and 20A of the Securities Exchange Act of 1934 based on alleged
false and misleading disclosures or omissions regarding
Dells financial statements, governmental investigations,
internal controls, known battery problems and business model,
and based on insiders sales of Dell securities. This
action also includes Dells independent registered public
accounting firm, PricewaterhouseCoopers LLP, as a defendant. On
October 6, 2008, the court dismissed all of the
plaintiffs claims with prejudice and without leave to
amend.
Four other putative class actions that were also filed in the
Western District, Austin Division, by purported participants in
the Dell 401(k) Plan have been consolidated as In re Dell
ERISA Litigation, and lead plaintiffs have been appointed by
the court. The lead plaintiffs have asserted claims under ERISA
based on allegations that Dell and certain current and former
directors and officers imprudently invested and managed
participants funds and failed to disclose information
regarding its stock held in the 401(k) Plan. On June 23,
2008, the court granted the defendants motion to dismiss
as to the plaintiffs claims under ERISA based on
allegations of imprudence, but the court denied the motion to
dismiss as to the claims under ERISA based on allegations of a
failure to accurately disclose information. In addition, seven
shareholder derivative lawsuits that were filed in three
separate jurisdictions were consolidated as In re Dell
Derivative Litigation into three actions. One of those
consolidated actions was pending in the Western District of
Texas, Austin Division, but was dismissed without prejudice by
an order filed October 9, 2007. The two other consolidated
shareholder derivative actions are pending in Delaware Chancery
Court and in state district court in Williamson County, Texas.
These shareholder derivative lawsuits name various current and
former officers and directors as defendants and Dell as a
nominal defendant, and assert various claims derivatively on
behalf of Dell under state law, including breaches of fiduciary
duties. Dell intends to defend all of these lawsuits.
Due to the preliminary nature of these cases Dell believes that
any potential future liability is not currently probable or
reasonably estimable.
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n
|
Copyright Levies Proceedings against the IT
industry in Germany seek to impose levies on equipment such as
personal computers and multifunction devices that facilitate
making private copies of copyrighted materials. The total levies
due, if imposed, would be based on the number of products sold
and the per-product amounts of the levies, which vary. Dell,
along with other companies and various industry associations,
are opposing these levies and instead are advocating
compensation to rights holders through digital rights management
systems.
|
On December 29, 2005, Zentralstelle Für private
Überspielungrechte (ZPÜ), a joint
association of various German collection societies, instituted
arbitration proceedings against Dells German subsidiary
before the Arbitration Body in Munich. ZPÜ claims a levy of
18.4 per PC that Dell sold in Germany from January 1,
2002, through December 31, 2005. On July 31, 2007, the
Arbitration Body recommended a levy of 15 on each PC sold
during that period for audio and visual copying capabilities.
Dell and ZPÜ rejected the recommendation, and on
February 21, 2008, ZPÜ filed a lawsuit in the German
Regional Court in Munich. Dell plans to continue to defend this
claim vigorously and does not expect the outcome to have a
material adverse effect on its financial condition or results of
operations. Dell is
76
currently not aware of any other pending levy cases before the
German Federal Supreme Court that could reasonably be expected
to have a material adverse impact on Dell.
|
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n
|
Lucent v. Dell In February 2003, Lucent
Technologies, Inc. filed a lawsuit against Dell alleging that
Dell infringed 12 patents owned by Lucent and seeking monetary
damages and injunctive relief. The asserted patents are owned by
two parties: Alcatel-Lucent and Multimedia Patent Trust
(MPT). Dell settled with MPT, licensing the patents
asserted by MPT in the lawsuit, but not with Alcatel-Lucent.
Trial as to the Alcatel-Lucent owned patents resulted in a jury
verdict on April 4, 2008. The verdict was in Dells
favor except for a $51,000 liability for infringement of one of
the Alcatel-Lucent owned patents (which is subject to indemnity
by Microsoft). Given the recent favorable court rulings and the
resolution of the indemnity coverage related to Microsoft
products, Dell reduced its reserves by $55 million through
cost of sales in the first quarter of Fiscal 2009. In a decision
dated May 8, 2008, the Federal Circuit Court of Appeals
reversed the claim interpretation and remanded to the District
Court one of the patents on which Dell had won summary judgment
(which is also subject to the Microsoft indemnity). Dell does
not expect the outcome of this legal proceeding to have a
material adverse effect on its financial condition or results of
operations or cash flows.
|
Dell is currently under income tax audits in various
jurisdictions, including the United States. The tax periods open
to examination by the major taxing jurisdictions to which Dell
is subject include fiscal years 1997 through 2008. Dell does not
anticipate a significant change to the total amount of
unrecognized income tax benefits within the next 12 months.
Dell has received certain non-income tax assessments and is
involved in related non-income tax litigation matters in a
non-United
States jurisdiction. Dell believes its positions are
supportable, a liability is not probable, and that it will
ultimately prevail. However, significant judgment is required in
determining the ultimate outcome of these matters. In the normal
course of business, Dells positions and conclusions
related to its non-income taxes could be challenged and
assessments may be made. To the extent new information is
obtained and Dells views on its positions or probable
outcomes of assessments or litigation changes, changes in
estimates to Dells accrued liabilities would be recorded
in the period in which the determination is made.
Dell is involved in various other claims, suits, investigations,
and legal proceedings that arise from time to time in the
ordinary course of its business. Although Dell does not expect
that the outcome in any of these other legal proceedings,
individually or collectively, will have a material adverse
effect on its financial condition or results of operations,
litigation is inherently unpredictable. Therefore, Dell could
incur judgments or enter into settlements of claims that could
adversely affect its operating results or cash flows in a
particular period.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
Quantitative
and Qualitative Disclosures About Market Risk
Response to this item is included in Managements
Discussion and Analysis of Financial Condition and Results of
Operations Market Risk and is incorporated
herein by reference.
77
MANAGEMENT
Directors
and Executive Officers
The following table sets forth the name, age, and position of
each of the persons who were serving as our directors and
executive officers as of August 1, 2008:
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Name
|
|
Age
|
|
Title
|
|
Michael S. Dell
|
|
|
43
|
|
|
Chairman of the Board and Chief Executive Officer
|
Donald J. Carty
|
|
|
62
|
|
|
Director
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William H. Gray, III
|
|
|
66
|
|
|
Director
|
Sallie L. Krawcheck
|
|
|
43
|
|
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Director
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Alan (A.G.) Lafley
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61
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Director
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Judy C. Lewent
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59
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Director
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Thomas W. Luce, III
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68
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Director
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Klaus S. Luft
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66
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Director
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Alex J. Mandl
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64
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Director
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Michael A. Miles
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69
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Director
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Sam Nunn
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69
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Director
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Bradley R. Anderson
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Senior Vice President, Business Product Group
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Paul D. Bell
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47
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Senior Vice President and President, Americas
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Michael R. Cannon
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55
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President, Global Operations
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Jeffrey W. Clarke
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45
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Senior Vice President, Business Product Group
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Andrew C. Esparza
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50
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Senior Vice President, Human Resources
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Stephen J. Felice
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51
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Senior Vice President and President, Asia Pacific-Japan
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Ronald G. Garriques
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44
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President, Global Consumer Group
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Brian T. Gladden
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Senior Vice President and Chief Financial Officer
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Mark Jarvis
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Senior Vice President, Chief Marketing Officer
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David A. Marmonti
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Senior Vice President and President, Europe, Middle East, and
Africa
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Stephen F. Schuckenbrock
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Senior Vice President and President, Global Services and Chief
Information Officer
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Lawrence P. Tu
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Senior Vice President, General Counsel and Secretary
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Set forth below is biographical information about each of our
directors and executive officers.
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Michael S. Dell Mr. Dell currently
serves as Chairman of the Board of Directors and Chief Executive
Officer. He has held the title of Chairman of the Board since he
founded the Company in 1984. Mr. Dell served as Chief
Executive Officer of Dell from 1984 until July 2004 and resumed
that role in January 2007. He serves on the Foundation Board of
the World Economic Forum, serves on the executive committee of
the International Business Council, and is a member of the
U.S. Business Council. He also serves on the
U.S. Presidents Council of Advisors on Science and
Technology and sits on the governing board of the Indian School
of Business in Hyderabad, India.
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Donald J. Carty Donald J. Carty has been a
member of the Board since December 1992. He served as
Dells vice chairman and chief financial officer from
January 2007 until June 2008. Mr. Carty retired in 2003 as
the chairman and CEO of AMR Corporation and American Airlines.
He had served in that position since 1998. Prior to that he
served as president of AMR Airline Group and American Airlines.
Between 1989 and 1995, Mr. Carty was executive vice
president-finance and planning for AMR and American Airlines.
Mr. Carty had been Americans senior vice president
and controller before leaving the airline in March 1985 to
become president and CEO of CP Air in Canada. In March of 1987,
he returned to American and was elected senior vice
president-airline planning. Before joining American, Carty spent
seven years in various management positions with Celanese
Canada, Ltd., Air Canada, and the Canadian Pacific Railway.
Mr. Carty is also a director of Barrick Gold Corp.,
Hawaiian Holdings and CHC Helicopter Corp. He also serves as
Chairman of the Board of Virgin America Airlines and Porter
Airlines of Canada.
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William H. Gray, III Mr. Gray has
served as a member of our Board of Directors since November
2000. He is Chairman of the Amani Group (a consulting and
advisory firm), a position he has held since August 2004.
Mr. Gray was President and Chief Executive Officer of The
College Fund/UNCF (educational assistance) from 1991 until he
retired in June 2004. He was a member of the United States House
of Representatives from 1979 to 1991. During his tenure, he was
Chairman of the House Budget Committee, a member of the
Appropriations Committee and Chairman of the House Democratic
Caucus and Majority Whip. He is an ordained Baptist Minister and
last pastored at Bright Hope Baptist Church of Philadelphia from
1972 until 2007. Mr. Gray is also a director of
J.P. Morgan Chase & Co., Prudential Financial
Inc., Visteon Corporation and Pfizer Inc.
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Sallie L. Krawcheck Ms. Krawcheck has
served as a member of our Board of Directors since July 2006.
She is the Chairman, Citi Global Wealth Management. From 2002
until March 2007, Ms. Krawcheck served as Chief Financial
Officer and Head of Strategy for Citigroup Inc. She is also a
member of the Citi Management, Operating and Business Heads
Committees. Ms. Krawcheck joined Citi in October 2002 as
Chairman and Chief Executive Officer of Smith Barney. Prior to
joining Citi, Ms. Krawcheck was Chairman and Chief
Executive Officer of Sanford C. Bernstein & Company.
She also served as an Executive Vice President of
Bernsteins parent company, Alliance Capital Management,
from 1999 to 2001. Ms. Krawcheck is a member of the Board
of Directors of the University of North Carolina at Chapel Hill
Foundations, Inc., the Board of Directors of Carnegie Hall, the
Board of Overseers of Columbia Business School and the Board of
Trustees for the Economic Club of New York.
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Alan (A.G.) Lafley Mr. Lafley has served
as a member of our Board of Directors since July 2006. He is the
Chairman of the Board and Chief Executive Officer of The
Procter & Gamble Company. Mr. Lafley joined
Procter & Gamble in 1977, and has served in a variety
of executive level positions since 1992. He was named President
and Chief Executive in 2000 and Chairman of the Board in 2002.
Mr. Lafley also serves on the Board of General Electric
Company, and on the Board of the Cincinnati Center City
Development Corporation. He is a Trustee of Hamilton College and
is a member of the Business Roundtable and the Business Council.
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Judy C. Lewent Ms. Lewent has served as
a member of our Board of Directors since May 2001. Until
September 2007, Ms. Lewent served as the Executive Vice
President, Chief Financial Officer of Merck & Co.,
Inc. She served as Chief Financial Officer of Merck starting in
1990 and also held various other financial and management
positions after joining Merck in 1980. Ms. Lewent is also a
director of Motorola, Inc. and Thermo Fisher Scientific Inc.
Ms. Lewent is a trustee and the chairperson of the audit
committee of the Rockefeller Family Trust, a life member of the
Massachusetts Institute of Technology Corporation and a member
of the American Academy of Arts and Sciences.
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Thomas W. Luce, III Mr. Luce has
served as a member of our Board of Directors from November 1991
to September 2005 and from September 2006 through the present.
He currently serves as President, Chief Executive Officer, and
Director of the National Math and Science Initiative Inc., a
not-for-profit organization dedicated to expanding programs that
have a proven positive impact on math and science education. He
served as United States Assistant Secretary of Education for
Planning, Evaluation and Policy Development from July 1,
2005, until his resignation September 1, 2006. From 1997
until 2005, Mr. Luce was a partner of the business advisory
firm Luce & Williams, Ltd. Mr. Luce was a
founding partner and managing partner of the law firm of
Hughes & Luce, LLP from 1973 until his retirement from
the firm in 1997, and was Of Counsel with that law firm until
December 2003.
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Klaus S. Luft Mr. Luft has served as a
member of our Board of Directors since March 1995. He is the
founder and Chairman of the Supervisory Board of Artedona AG, a
privately held mail order
e-commerce
company established in 1999 and headquartered in Munich,
Germany. He is also owner and President of Munich-based
MATCH Market Access Services GmbH & Co.,
KG. Since August 1990, Mr. Luft has served as Vice Chairman
and International Advisor to Goldman Sachs Europe Limited. From
March 1986 to November 1989, he was Chief Executive Officer of
Nixdorf Computer AG, where he served for more than 17 years
in a variety of executive positions in marketing, manufacturing,
and finance. Mr. Luft is the Honorary Consul of the
Republic of Estonia in the State of Bavaria.
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Alex J. Mandl Mr. Mandl has served as a
member of our Board of Directors since November 1997. He is
currently the non-Executive Chairman of Gemalto, a company
resulting from the merger of Axalto Holding
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N.V. and Gemplus International S.A. From June 2006 until
December 2007, Mr. Mandl served as Executive Chairman of
Gemalto. Before June 2006, Mr. Mandl was President, Chief
Executive Officer and a member of the Board of Directors of
Gemplus, positions he held since August 2002. He has served as
Principal of ASM Investments, a company focusing on early stage
funding in the technology sector, since April 2001. From 1996 to
March 2001, Mr. Mandl was Chairman and CEO of Teligent,
Inc., which offered business customers an alternative to the
Bell Companies for local, long distance and data communication
services. Mr. Mandl was AT&Ts President and
Chief Operating Officer from 1994 to 1996, and its Executive
Vice President and Chief Financial Officer from 1991 to 1993.
From 1988 to 1991, Mr. Mandl was Chairman of the Board and
Chief Executive Officer of
Sea-Land
Services Inc. Mr. Mandl is also a board member of Hewitt
Associates, Inc., Horizon Lines, Inc. and Visteon Corporation.
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Michael A. Miles Mr. Miles has served as
a member of our Board of Directors since February 1995. He is a
special limited partner and a member of the Advisory Board of
the investment firm Forstmann Little and Co. He is the former
Chairman of the Board and Chief Executive Officer of Philip
Morris Companies Inc., having served in those positions from
September 1991 to July 1994. Prior to September 1991,
Mr. Miles was Vice Chairman and a member of the board of
directors of Philip Morris Companies Inc. Mr. Miles is also
a director of Time Warner Inc., AMR Corporation and Citadel
Broadcasting Corp. and a trustee of Northwestern University.
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Sam Nunn Mr. Nunn has served as a member
of our Board of Directors since December 1999. He is Co-Chairman
and Chief Executive Officer of the Nuclear Threat Initiative
(NTI), a charitable organization working to reduce the global
threats from nuclear, biological and chemical weapons. He was a
Senior Partner at the law firm of King & Spalding,
Atlanta, Georgia, from 1997 until 2003. From 1972 through 1996,
he served as a United States Senator from Georgia. During his
tenure as Senator, he served as Chairman of the Senate Armed
Services Committee and the Permanent Subcommittee on
Investigations. He also served on the Intelligence and Small
Business Committees. Mr. Nunn also serves as a director of
Chevron Corporation, The
Coca-Cola
Company and General Electric Company.
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Bradley R. Anderson Mr. Anderson joined
us in July 2005 and serves as Senior Vice President, Business
Product Group. In this role, he is responsible for worldwide
engineering, design, development, and marketing of our
enterprise products, including servers, networking, and storage
systems. Prior to joining Dell, Mr. Anderson was Senior
Vice President and General Manager of the Industry Standard
Servers business at Hewlett-Packard Company (HP),
where he was responsible for HPs server solutions.
Previously, he was Vice President of Server, Storage, and
Infrastructure for HP, where he led the team responsible for
server, storage, peripheral, and infrastructure products. Before
joining HP in 1996, Mr. Anderson held top management
positions at Cray Research in executive staff, field marketing,
sales, finance, and corporate marketing. Mr. Anderson
earned a bachelor of science in Petroleum Engineering from Texas
A&M University and a Master of Business Administration from
Harvard University. He serves on the Texas A&M Look College
of Engineering Advisory Council.
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Paul D. Bell Mr. Bell has been with us
since 1996 and has served as Senior Vice President and
President, Americas since March 2007. In this role,
Mr. Bell is responsible for all sales and customer support
operations across the Americas region other than our consumer
business. From February 2000 until March 2007, Mr. Bell
served as Senior Vice President and President, Europe, Middle
East, and Africa. Prior to this, Mr. Bell served as Senior
Vice President, Home and Small Business. Prior to joining Dell
in July 1996, Mr. Bell was a management consultant with
Bain & Company for six years, including two years as a
consultant on our account. Mr. Bell received
bachelors degrees in Fine Arts and Business Administration
from Pennsylvania State University and a Master of Business
Administration degree from the Yale School of Organization and
Management.
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Michael R. Cannon Mr. Cannon joined us
in February 2007 as President, Global Operations. In this role,
he is responsible for our manufacturing, procurement, supply
chain, and facilities activities worldwide. Prior to joining
Dell, Mr. Cannon was President, Chief Executive Officer,
and a director of Solectron Corporation from January 2003 to
February 2007, and President, Chief Executive Officer, and a
director of Maxtor Corporation (now a part of Seagate
Technology) from July 1996 to January 2003. Mr. Cannon has
also worked at IBMs
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Storage Systems Division. He began his career in engineering at
The Boeing Company, where he held a management position with the
Manufacturing Research and Development organization.
Mr. Cannon studied mechanical engineering at Michigan State
University and completed Harvard Business Schools Advanced
Management Program. He currently serves on the board of Adobe
Systems.
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Jeffrey W. Clarke Mr. Clarke has served
as Senior Vice President, Business Product Group since January
2003. In this role, he is responsible for worldwide engineering,
design, development, and marketing of our business client
products, including Dell
OptiPlextm
desktops,
Latitudetm
notebooks,
Precisiontm
workstations, and
Vostrotm
desktops and notebooks. Mr. Clarke joined Dell in 1987 as a
quality engineer and has served in a variety of engineering and
management roles. In 1995 Mr. Clarke became the director of
desktop development, and from November 2001 to January 2003 he
served as Vice President and General Manager, Relationship
Product Group. Mr. Clarke received a bachelors degree
in Electrical Engineering from the University of Texas at
San Antonio.
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Andrew C. Esparza Mr. Esparza joined us
in 1997 as a director of Human Resources in the Product Group.
He was named Senior Vice President, Human Resources in March
2007 and was named an executive officer in September 2007. In
this role, he is responsible for driving the strategy and
supporting initiatives to attract, motivate, develop, and retain
world-class talent in support of our business goals and
objectives. He also has responsibility for corporate security
and corporate responsibility on a worldwide basis. He currently
is an executive sponsor for aDellante, our internal networking
group responsible for the development of Hispanic employees
within the company. Prior to joining Dell, he held human
resource positions with NCR Corporation from 1985 until 1997 and
Bechtel Power Corporation from 1981 until 1985. Mr. Esparza
earned a bachelors degree in business administration with
a concentration in human resource management from San Diego
State University.
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Stephen J. Felice Mr. Felice serves as
Senior Vice President and President, Asia Pacific-Japan. He was
named Senior Vice President in March 2007, after having served
as Vice President, Asia Pacific-Japan since August 2005.
Mr. Felice leads our operations throughout the APJ region,
including sales and customer service centers in Penang,
Malaysia, and Xiamen, China. Mr. Felice joined us in
February 1999 and has held various executive roles in our sales
and consulting services organizations. From February 2002 until
July 2005, Mr. Felice was Vice President, Corporate
Business Group, Dell Americas. Prior to joining Dell,
Mr. Felice served as Chief Executive Officer and President
of DecisionOne Corp. Mr. Felice also served as Vice
President, Planning and Development, with Bell Atlantic Customer
Services. He spent five years with Shell Oil in Houston.
Mr. Felice holds a bachelors degree in business
administration from the University of Iowa and a Master of
Business Administration degree from the University of Houston.
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Ronald G. Garriques Mr. Garriques joined
us in February 2007 as President, Global Consumer Group. In this
role he is responsible for all aspects of our consumer business,
including sales, marketing, and product design. Before joining
Dell, Mr. Garriques served in various leadership roles at
Motorola from February 2001 to February 2007, where he was most
recently Executive Vice President and President, responsible for
the Mobile Devices division. He was also Senior Vice President
and General Manager of the Europe, Middle East, and Africa
region for the Personal Communications Services division, and
Senior Vice President and General Manager of Worldwide Products
Line Management for the Personal Communications Services
division. Prior to joining Motorola, Mr. Garriques held
management positions at AT&T Network Systems, Lucent
Technologies, and Philips Consumer Communications.
Mr. Garriques holds a masters degree in business
administration from The Wharton School at the University of
Pennsylvania, a masters degree in mechanical engineering
from Stanford University, and a bachelors degree in
mechanical engineering from Boston University.
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Brian T. Gladden Mr. Gladden joined Dell
effective May 20, 2008, as Senior Vice President and,
effective June 13, 2008, as Chief Financial Officer. He was
President and Chief Executive Officer of SABIC Innovative
Plastics, a business unit of Saudi Basic Industries Corporation
(SABIC), since its formation in August 2007 until May 2008. His
previous experience includes nearly 20 years with General
Electric (GE) in a variety of financial and management
leadership roles. From August 2005 until August 2007,
Mr. Gladden was the Vice President and General Manager for
the GE Plastics resins business. From 2002 until August 2005,
Mr. Gladden
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served as Chief Financial Officer of GE Plastics. Prior roles
include Vice President and Chief Financial Officer of GE Medical
Systems Healthcare IT business. He received a Bachelor of
Science degree in business administration and finance from
Millersville University in Millersville, Pa.
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Mark Jarvis Mr. Jarvis joined us in
October 2007 as Senior Vice President, Chief Marketing Officer.
He is responsible for our global marketing efforts, spanning the
consumer and commercial businesses, and including global brand,
online, and communications. From April 2007 until October 2007,
Mr. Jarvis served as a consultant to Dell in the Chief
Marketing Officer role. Prior to joining Dell, Mr. Jarvis
spent 14 years at Oracle, where he launched numerous
products and drove highly innovative marketing programs,
including Oracles
E-Business
Network and Oracle Technology Network, and also managed
Oracles showcase OpenWorld Conference.
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David A. Marmonti Mr. Marmonti serves as
Senior Vice President and President, Europe, Middle East, and
Africa, having been appointed to that position in March 2007. In
this role, he is responsible for all business operations across
the EMEA region, including sales and customer call centers in
the region. Mr. Marmonti joined us in 1998 and has held a
variety of roles, including Vice President and General Manager
of our Public Business Group; Vice President and General Manager
of our Mid-Markets and Preferred Corporate Accounts segments;
Vice President and General Manager of our EMEA Home and Small
Business division; Vice President of Marketing &
e-business
for the U.S. Consumer segment; and Director and General
Manager of the U.S. Asset Recovery Business. Prior to
joining Dell, Mr. Marmonti spent 16 years at AT&T
in a variety of senior roles, including executive positions in
sales and marketing, serving corporate customers.
Mr. Marmonti holds a bachelors degree in business
administration and marketing from the University of Missouri at
St. Louis.
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Stephen F. Schuckenbrock
Mr. Schuckenbrock joined us in January 2007
as Senior Vice President and President, Global Services. In
September 2007, he assumed the additional role of Chief
Information Officer. He is responsible for all aspects of our
services business, with worldwide responsibility for Dell
enterprise service offerings, and is also responsible for our
global information systems and technology structure. Prior to
joining us, Mr. Schuckenbrock served as Co-Chief Operating
Officer and Executive Vice President of Global Sales and
Services for Electronic Data Systems Corporation
(EDS). Before joining EDS in 2003, he was Chief
Operating Officer of The Feld Group, an information technology
consulting organization. Mr. Schuckenbrock served as Global
Chief Information Officer for PepsiCo from 1998 to 2000.
Mr. Schuckenbrock earned a bachelors degree in
business administration from Elon University.
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Lawrence P. Tu Mr. Tu joined us as
Senior Vice President, General Counsel and Secretary in July
2004, and is responsible for overseeing Dells global legal
department and governmental affairs. Before joining Dell,
Mr. Tu served as Executive Vice President and General
Counsel at NBC Universal for three years. Prior to his position
at NBC, he was a partner with the law firm of
OMelveny & Myers LLP, where he focused on high
technology, internet, and media related transactions. He also
served five years as managing partner of the firms Hong
Kong office. Mr. Tus prior experience also includes
serving as General Counsel Asia-Pacific for Goldman Sachs,
attorney for the U.S. State Department, and law clerk for
U.S. Supreme Court Justice Thurgood Marshall. Mr. Tu
holds Juris Doctor and bachelor of arts degrees from Harvard
University, as well as a masters degree from Oxford
University, where he was a Rhodes Scholar.
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82
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Introduction
This Compensation Discussion and Analysis is designed to provide
stockholders with an understanding of our compensation
philosophy, core principles and decision making process. It
discusses the Leadership Development and Compensation
Committees determinations of how and why, in addition to
what, compensation actions were taken for the executive officers
identified in the Summary Compensation Table below (the
Named Executive Officers).
Specifically, the Leadership Development and Compensation
Committee has the responsibilities listed below. For more
information about the committees role, see the
committees charter, which can be found on Dells
website at www.dell.com/corporategovernance.
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Reviewing with management and approving the compensation
philosophy and core objectives of the compensation program for
executive officers
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Evaluating the performance of the Chairman and Chief Executive
Officer in light of the current business environment and our
strategic objectives
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Reviewing and recommending to the full Board the amounts and
types of compensation to be paid to the Chairman and Chief
Executive Officer and reviewing and approving all forms of
compensation to be provided to the other executive officers,
including establishing target opportunity levels, setting
performance goals and certifying results
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Acting as administrator of our compensation plans, including
granting awards to executive officers
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Evaluating the need for, and provisions of, employment contracts
or severance arrangements for the executive officers
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The Leadership Development and Compensation Committee has
delegated its authority with respect to compensation decisions
for non-executive officer employees to the Chairman and Chief
Executive Officer, subject to periodic review by the committee.
The sections presented will follow in the order of the duties
listed above.
Executive
Compensation Philosophy and Core Objectives
The Leadership Development and Compensation Committee is
committed to and responsible for designing, implementing and
administering a compensation program for executive officers that
ensures appropriate linkage between pay, company performance and
results for stockholders. The committee seeks to increase
stockholder value by rewarding performance with cost-effective
compensation and ensuring that we can attract and retain the
best executive talent through adherence to the following core
compensation objectives:
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Providing compensation commensurate with the level of business
performance achieved, ranging from above-average overall rewards
for performance that exceeds that of our peers to below-average
compensation for below-average performance;
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Providing a total compensation opportunity that is competitive
with similar high-tech and other large global companies that we
compete with for talent;
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Managing fixed costs by combining a conservative approach to
base salaries and benefits, with a greater focus on
performance-dependent short- and long-term incentives;
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Recognizing and rewarding the achievement of both corporate and
individual performance goals; and
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Heavily weighting the compensation package towards long-term,
performance-dependent incentives to better align the interests
of executives with stockholders.
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Our compensation programs are designed to reward achievement of
corporate priorities, and these programs will change from time
to time as necessary to support the corporate priorities and as
those priorities change. The specific principles, components and
decisions used in Fiscal 2008 to manage the compensation of
executive officers are discussed in more detail below.
83
Evaluating
Performance
Process
for Evaluating Chairman and Chief Executive Officer
Performance
All recommendations relating to the compensation of the Chairman
and Chief Executive Officer are made by the Leadership
Development and Compensation Committee in executive session,
without management present. In assessing the compensation of the
Chairman and Chief Executive Officer, the committee considers
the performance of the company, the executives
contribution to that performance, and other factors (including
experience, retention and criticality of skill-set) in the same
manner as for any other executive officer. The committees
recommendations are subject to approval of the full Board of
Directors.
Environment
We operate in a highly competitive industry that includes
several other large branded competitors as well as a number of
smaller branded and generic competitors. As Dells
historical cost advantage has been steadily eroded by
competitors, the need to reposition for the future has become
undeniable. In Fiscal 2008, management developed and began to
implement a transformational strategy. The following five focus
areas have been identified as critical to successfully executing
this transformation:
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Better meeting the needs of small and medium business customers;
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Better meeting the needs of consumers and improving
profitability of our consumer business;
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Improving notebook products and sales channels;
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Better meeting the needs of enterprise customers; and
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Growing in emerging countries.
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The strategy relies on initiatives in the following areas:
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New products;
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Operating expense reductions;
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Expanded service offerings;
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Renewed emphasis on customer satisfaction;
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Global consumer business; and
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Retail
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Results
Fiscal 2008 was a year of change for Dell. The founder, recently
returned to the position of Chief Executive Officer,
strengthened the leadership team of the company by adding
significant external talent and began a restructuring effort
aimed at reducing costs and realigning the business from a
predominantly geographic focus to one organized by global
business segments. A number of the companys long-term
strategic initiatives, aimed at driving sustainable performance
and improving areas such as customer satisfaction, continued to
show positive results during the year, and, as a result,
financial performance was strengthened. The compensation actions
taken for the Chairman and Chief Executive Officer and the other
Named Executive Officers based on these results are discussed in
the next section.
Executive
Officer Compensation
The Total
Compensation Package
Process When making individual compensation
decisions for executive officers, the committee takes many
factors into account, including the performance of the company
overall; the recommendation of the Chairman and Chief Executive
Officer (except for decisions relating to his own compensation);
the individuals performance and experience; the
individuals historical compensation; comparisons to other
executive officers (both those of the company and those of
Dells peer group); and any retention concerns if relevant.
Compensation Consultants The charter of the
Leadership Development and Compensation Committee authorizes the
Committee to engage independent consultants at any time at the
expense of the company, but did not
84
engage independent consultants in Fiscal 2008. The Committee
periodically evaluates the need to engage outside consultants.
Elements of the Total Compensation Package
The key elements of the compensation program for our
executive officers are base salary, annual incentive bonus,
long-term incentives and benefits and perquisites.
The chart below is representative of the target overall pay mix
for our Named Executive Officers, excluding Mr. Dell, who
does not receive any long-term incentives. The committee takes a
holistic approach to executive compensation and balances the
individual compensation elements for each executive officer
individually. The total compensation package for each Named
Executive Officer is tailored to the individual. A
representative comparison of the Fiscal 2008 target value of
each element to the whole for the Named Executive Officer
population is illustrated in the following graphic:
Target Pay
Mix Chart
Pay Mix Because executive officers are in a
position to directly influence the overall performance of the
company, and in alignment with our highly-leveraged
pay-for-performance philosophy, a significant portion of their
compensation is delivered in the form of performance-dependent,
short- and long-term incentive programs. The level of
performance-dependent pay varies for each executive based on
level of responsibility market practices, and internal equity
considerations.
Competitive Market Assessment The Leadership
Development and Compensation Committee annually reviews market
compensation levels for executive officers at similar high-tech
and other large global general industry companies to determine
whether the compensation components for our executive officers
remain in the targeted ranges described below under
Market Positioning. With the assistance
of the human resources department, management collects and
presents to the Leadership Development and Compensation
Committee compensation data for the top five most highly-paid
executive officers from a list of targeted comparator companies
as well as data for all executive officers from published
compensation surveys. These compensation surveys include data on
high-tech and general industry pay practices for each executive
position at companies similar in size and complexity to Dell.
The compensation assessment includes an evaluation of base
salary, target annual incentive opportunities, long-term
incentive grant values and benefits for each of our executive
officers relative to similar positions in the market.
Dells total compensation levels are set at these
benchmarks with the exception of the following situations:
(a) the scope of responsibilities for the benchmarked Dell
position is believed to be significantly different from those
for which peer data is available; (b) the Dell position is
believed to be significantly more vital to Dells success
than at peer companies; or (c) the incumbent filling the
Dell position is believed to be critical to Dells future
success. In these limited situations, total compensation may be
set at levels in the top half of current market guidelines.
The peer group for evaluating pay for the executive officers is
based on those companies with which we compete for talent. The
committee reviews and approves the peer group annually using an
assessment of sales volumes, market capitalization, number of
employees, product mix and business results. The peer group
generally remains consistent year-over-year unless compelling
reasons for adding or removing companies are identified. The
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peer group used to evaluate executive pay practices at the
beginning of Fiscal 2008 consisted of the following
24 companies:
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Advanced Micro Devices, Inc.
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Home Depot Inc.
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Apple Inc.
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Honeywell International Inc.
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Applied Materials Inc.
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Intel Corp.
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Best Buy Co., Inc.
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International Business Machines Corp.
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CDW
Corp.a
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Johnson & Johnson
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Cisco Systems Inc.
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Lexmark International Inc.
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Citigroup Inc.
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Microsoft Corp.
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Computer Sciences Corp.
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Motorola, Inc.
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Electronic Data Systems
Corp.b
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Oracle Corp.
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EMC Corp.
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Procter & Gamble Co.
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General Electric Company
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Texas Instruments Inc.
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Hewlett Packard Co.
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Wal Mart Stores Inc.
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(a)
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CDW Corp. will cease to be a part
of Dells peer group for Fiscal 2009 as a result of its
acquisition by an entity controlled by investment funds
affiliated with Madison Dearborn Partners, LLC and Providence
Equity Partners Inc.
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(b)
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Electronic Data Systems Corp. will
cease to be a part of Dells peer group for Fiscal 2009 as
a result of its recent acquisition by Hewlett Packard Co.
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Market Positioning The Leadership Development
and Compensation Committee targets base salary and benefits at
the median of competitive market practices and variable
compensation (annual incentives and the grant value of long-term
incentives) at the 75th percentile of the market for each
component. The committee believes that above-average overall pay
positioning will allow us to attract and retain the appropriate
level of executive talent while appropriately rewarding high
performance through stretch performance objectives. As
discussed, the actual target compensation for each individual
executive may be higher or lower than the targeted market
position based on individual skills, experience, contribution,
performance, internal equity, or other factors that the
committee may take into account that are relevant to the
individual executive. In addition, actual compensation results
(e.g., amounts earned and paid each year) may be higher or lower
than target based on corporate and regional/business unit
performance.
Individual
Compensation Components
Base
Salary
Design Dells philosophy is that base
salaries should meet the objectives of attracting and retaining
the executive officers needed to run the business. The base
salaries are targeted at market median levels, although each
executive officer may have a base salary above or below the
median of the market. Actual individual salary amounts are not
objectively determined, but instead reflect the committees
judgment with respect to each executive officers
responsibility, performance, experience and other factors,
including any retention concerns, the individuals
historical compensation and internal equity considerations.
During Fiscal 2008, the Leadership Development and Compensation
Committee carefully considered the input and recommendations of
Mr. Dell as Chairman and Chief Executive Officer when
evaluating factors relative to the other executive officers in
order to approve salary adjustments.
Results As noted above, the focus of the
compensation package is on the performance based elements. As a
result, in Fiscal 2008, annual salary increases among executive
officers generally were modest (matching or slightly lagging
general market salary movements) as more focus was placed on the
annual incentive bonus and the long-term incentive program.
Annual
Incentive Bonus
Design The annual incentive bonus plan is
designed to align executive officer pay with overall company
financial performance. The plan provides a reward based on the
achievement of corporate and individual
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performance objectives. Annual incentives for Fiscal 2008 were
paid to executive officers under the Executive Annual Incentive
Bonus Plan. This plan was designed to qualify as tax-deductible
under Section 162(m) of the Internal Revenue Code, and was
approved by stockholders at the 2003 annual meeting.
Stockholders at the 2008 annual meeting approved a new Executive
Annual Incentive Bonus Plan for bonuses to be paid in Fiscal
2009. The new Executive Annual Incentive Bonus Plan is
substantially identical to the plan in effect during Fiscal 2008.
The Leadership Development and Compensation Committee
establishes a target incentive opportunity for each executive
officer expressed as a percent of base salary. As explained in
the chart under Executive Officer Compensation
The Total Compensation Package Elements of the Total
Compensation Package above, the base salary and annual
incentive bonus component of the pay mix are generally equal in
amount, each comprising approximately 15% of the pay mix.
Therefore, most Named Executive Officers were granted a target
incentive opportunity equal to their base salary. Mr. Dell,
the individual with the greatest overall responsibility for
company performance, was granted a larger incentive opportunity
in comparison to his base salary in order to weight his overall
pay mix even more heavily towards performance-based
compensation. For the Named Executive Officers, the target
annual incentives for Fiscal 2008 were as follows:
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Target Incentive as a%
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Named Executive
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of Base
Salarya
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Mr. Dell
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200%
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Mr. Carty
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100%
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Mr. Cannon
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100%
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Mr. Garriques
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100%
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Mr.
Jarvisb
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100%
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(a)
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To qualify for tax deductibility
under Section 162(m) of the Internal Revenue Code, the
maximum payout for Fiscal 2008 was capped at 0.10% of
consolidated net income for each named executive officer, with
the exception of Mr. Dell, whose payout was capped at 0.20%
of consolidated net income.
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(b)
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Because Mr. Jarvis commenced
employment in October 2007, the committee did not include him in
the Executive Annual Incentive Bonus Plan. His bonus amount was
consistent with those under the Executive Annual Incentive Bonus
Plan, but was paid pursuant to the bonus program available to
non-executive officers.
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To arrive at a payout number, the target percentage of salary
for each executive officer is multiplied by a formula based on
corporate performance and the achievement of individual
performance goals. The formula is illustrated below.
Corporate Performance Target At the end of
the year, the Leadership Development and Compensation Committee
evaluates company performance against specific financial and
strategic performance targets set at the beginning of the year
and modifies the bonus payout to 0% to 200% of the target
(subject to the possible application of the other modifiers
included in the formula). For Fiscal 2008, the financial
performance objective was operating income and is based on the
companys internal performance goals, as follows:
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Threshold
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Target
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Maximum
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Operating Income
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$
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1.8 billion
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$
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2.8 billion
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$
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5.6 billion
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Individual Performance The Leadership
Development and Compensation Committee, with input from
Mr. Dell, evaluates individual performance for the
companys executive officers using a mix of objective and
subjective performance criteria. For Fiscal 2008, some of the
considered objectives included:
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Achieving financial targets for the business segment or region
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Reducing costs
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Maintaining brand health
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Addressing human capital needs
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Meeting strategic objectives
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Supporting the five focus areas defined in the
Evaluating Performance
Environment section above.
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The committee believes that the performance objectives
established for each of these individual performance criteria
represent meaningful improvements for the organization and,
therefore, are reasonably difficult to attain.
After weighing achievement levels against these goals, the
committee, with input from Mr. Dell, assigned individual
performance modifiers for each of the executive officers, with
the exception of Mr. Dell, whose individual modifier was
set by the committee in executive session without management
present.
Results For Fiscal 2008, we achieved
operating income of $3.4 billion. Based on the formula
established at the beginning of Fiscal 2008, 13% of the
operating income was used to fund the companys bonus pool.
Consequently, the committee set the corporate performance
modifier at 106%. Based on its evaluation of individual
performance, during Fiscal 2008, the committee set individual
modifiers ranging from 75% to 120% for the Named Executive
Officers. The combination of target incentives, corporate
performance modifier and individual performance modifiers
yielded the payouts shown under Non-Equity Incentive Plan
Compensation in the Summary Compensation Table below.
Based upon his leadership in Dells activities for Fiscal
2008, including reorganizing the business, driving new growth
strategies, revamping the leadership team and other actions that
are expected to position the company for future success, the
Leadership Development and Compensation Committee recommended,
and the Board approved, a bonus payout to Mr. Dell of
$2,223,000. While Mr. Dell believes that the implemented
initiatives will have a positive impact on future company
performance, he did not wish to be rewarded until the success of
these strategies was demonstrated. As a result, Mr. Dell
declined a bonus for Fiscal 2008.
Long-Term
Incentives
Design Long-term incentives are the most
significant element of total executive officer compensation.
Performance-dependent components of compensation comprise much
of this element, consistent with our philosophy of driving
performance and thereby aligning the interests of executives
with other stockholders. These incentives are designed to
motivate executive officers to improve financial performance and
stockholder value, as well as encouraging the long-term
employment of the executive officers. These incentives include a
variety of stock and cash vehicles, such as:
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Stock options;
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Restricted stock units (RSUs);
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Performance-based restricted stock units
(PBUs); and
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Long-term cash awards.
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In Fiscal 2008 the annual awards to executive officers were
granted in a combination of stock options and performance-based
restricted stock units (PBUs). The stock options align the
interests of the executive officers with those of the
stockholders by providing a return only if the share price
appreciates, and the PBUs reward the achievement of specific
business objectives in addition to stock appreciation.
In awarding new long-term incentives, the Leadership Development
and Compensation Committee also considers level of
responsibility, prior experience and achievement of individual
performance criteria, as well as the compensation practices of
the peer group of companies used to evaluate total compensation.
The objective is to provide executive officers (other than the
Chairman and Chief Executive Officer) with above-average
long-term incentive award opportunities targeted at the
75th percentile of peer practices for on-going, annual
awards. The long-term incentive program is designed to be highly
leveraged, ensuring that if our stockholder returns exceed
industry norms, actual gains will exceed industry norms.
Conversely, the actual value of the award may drop substantially
when company goals are missed or stockholder returns
underperform industry norms. PBUs are
88
designed to deliver a minimum value and meet the companys
need to retain executive talent in a highly competitive market.
Dell currently maintains a rigorous process around the granting
of equity awards.
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Options are generally granted at the closing price of
Dells common stock on the date of grant.
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All equity grants to executive officers require the approval of
the Leadership Development and Compensation Committee.
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In general, awards pursuant to Dells annual long-term
incentive grant process are made on predetermined Board meeting
dates and new hire grants are made on the day an individual
commences employment.
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Dell does not backdate options or grant options or other equity
awards retroactively.
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Dell does not purposely schedule option awards or other equity
grants prior to the disclosure of favorable information or after
the announcement of unfavorable information.
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Fiscal 2008 Equity Opportunities In Fiscal
2008 the Leadership Development and Compensation Committee
established annual target long-term equity incentive
opportunities (estimated value at grant and granted in a
combination of stock options, PBUs and RSUs) for each eligible
executive officer. As Dells founder and largest individual
stockholder, Mr. Dell does not receive any long-term
incentive compensation. Each of the other Named Executive
Officers had recently received awards as part of his new-hire
compensation package and were not eligible for an annual grant.
See New Hire Packages below for details on
these awards.
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Stock Options Stock options are designed to
reward executive officers for the increase in Dells stock
price over time. Options represent the high-risk and potential
high-return component of our total long-term incentive program,
as the realizable value of each option can fall to zero if the
stock price is lower than the exercise price established on the
date of grant.
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The size of stock option grants for executive officers is based
primarily on the target dollar value of the award translated
into a number of option shares based on the estimated economic
value on the date of grant, as determined using the
Black-Scholes option pricing formula. As a result, the number of
shares underlying stock option awards will typically vary from
year to year, as it is dependent on the price of Dell common
stock on the date of grant.
In March 2007, the Leadership Development and Compensation
Committee approved grants of stock options to each of the
executive officers (other than Mr. Dell and the other Named
Executive Officers, each of whom had recently entered into
employment with Dell, or were not employed by Dell in March
2007) as part of our annual stock option grants. These
options had an exercise price equal to the fair market value of
Dell common stock on the date of grant (determined as the
average of the high and low stock price on The NASDAQ Stock
Market on the date of grant) and vest ratably over three years
(33% per year) beginning on the first anniversary of the date of
grant. Because the exercise price of these options is equal to
the fair market value of Dells common stock on the date of
grant, these stock options will deliver a reward only if the
stock price appreciates from the price on the date the stock
options were granted. This design is intended to focus the
executive officers on the long-term enhancement of stockholder
value.
After we delayed filing our Annual Report on
Form 10-K
for Fiscal 2007, we suspended the exercise of employee stock
options. As a result, some stock options expired while the
holders had no ability to exercise them or otherwise prevent
their expiration. To minimize the negative impact of the
situation on affected individuals, including current and former
executive officers, the Leadership Development and Compensation
Committee determined that we should nevertheless provide them
with the value that they would have received had they been
permitted to exercise the options. Therefore, we agreed to pay
those individuals cash payments generally equal to the
in-the-money value of the options at expiration. Those payments
were generally made within 45 days after we filed our
Annual Report on
Form 10-K
for Fiscal 2007 on October 30, 2007, and were intended to
compensate the affected individuals for the value they would
have received had their options been exercisable. The payments
were not considered in making other compensation decisions.
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RSUs Like stock options, RSUs are designed to
reward executives for increases in Dells stock price over
time. RSUs also provide a deferral of vesting and payout to help
retain executive officers. RSUs are denominated in full shares
of the companys common stock and, therefore, have a more
stable value over time as the stock price goes up or down (as
compared to options, which only have value if the stock price
increases). Dell typically grants RSUs as part of executive
new-hire packages in order to buy-out the approximate value of
unvested long-term incentives at a previous employer. Dell may
continue to grant RSUs to recently hired executives.
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PBUs PBUs are designed to reward participants
for the achievement of near-term financial objectives, while
also providing a deferral of vesting and payout to help retain
executive officers. Like RSUs, PBUs are denominated in full
shares of the companys common stock and, therefore, have a
more stable value over time as the stock price goes up or down.
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The size of PBU grants is based on a target dollar value of the
award divided by the stock price on the date of grant. The
actual number of shares earned by executive officers is
determined based on company performance measured over three
consecutive one-year periods against performance goals
predetermined at the beginning of each performance period. PBU
awards granted in Fiscal 2008 cliff vest on the third
anniversary of the date of grant.
One-third of the PBUs granted in March 2007 were subject to
Dells performance in Fiscal 2008. Operating income was
used as the performance measure during the Fiscal 2008
performance period. The table below provides the threshold,
target, and maximum performance levels and the percentage of
at-risk shares earned at these levels. The percentage of shares
earned is prorated within the ranges below based on the
performance level.
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Performance Goals
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Threshold
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Target
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Maximum
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Operating Income (in billions)
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$2.3
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$2.8
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$3.3
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Shares Earned
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80%
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100%
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120%
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The operating income achieved in Fiscal 2008 was
$3.4 billion resulting in the maximum number of at-risk
PBUs being awarded (120% of one-third of the target number of
PBUs awarded in March 2007).
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2006 Long-Term Cash Incentive Bonus Awards
None of the Named Executive Officers were
eligible to receive an award under this previously approved
program. The 2006 Long-Term Cash Incentive Bonus Program
(2006 LTCIP) was established in March 2005, to
motivate the executive team to achieve aggressive performance
goals for Fiscal 2007 and 2008. Payouts under the 2006 LTCIP
were based on the achievement of consolidated financial results
through Fiscal 2008 and were subject to continued employment
through Fiscal 2008. Based on the companys performance in
Fiscal 2007 and 2008, program financial goals were not achieved
in either year. Since the company did not achieve the threshold
financial targets specified under the program, the Leadership
Development and Compensation Committee made no payouts to any
executive officers participating in the program.
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2007 Long-Term Cash Engagement Awards None of
the Named Executive Officers were eligible to receive an award
under this previously approved program. In March 2006, the
Leadership Development and Compensation Committee implemented
the 2007 Long-Term Cash Engagement Award Program. All executive
officers employed at that time other than Mr. Dell were
eligible for cash engagement awards under this program. As Dell
has become recognized for our high-quality leaders, our
executives have increasingly become targets for recruitment to
key positions in other organizations. This program was intended
to better balance our existing long-term compensation programs
between cash and equity awards, and to enhance the overall
retention value of our compensation package.
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New Hire Packages In an effort to build a
world-class leadership team, the Leadership Development and
Compensation Committee must offer market competitive new hire
packages. The committee considers the following items in setting
a new hire offer:
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Alignment of compensation to market benchmarks;
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Alignment of compensation to internal peers;
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Value of annual incentive bonus forgone by leaving previous
employer;
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Value of unvested long-term incentives granted by previous
employer; and
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Desire to align interests with those of Dells stockholders
through long-term incentive grants.
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The following table describes the new hire packages given to the
Named Executive Officers during Fiscal 2008.
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Named Executive
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Long-Term Cash
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|
Officer
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Sign-on Bonus
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Optionsa
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RSUsb
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Awardc
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Mr. Cannon
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$
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2,000,000
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1,500,000
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375,000
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$
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7,500,000
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Mr. Garriques
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3,500,000
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500,000
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900,000
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3,000,000
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Mr. Jarvis
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250,000
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324,000
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3,000,000
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